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Money and inflation in the Euro Area: A case for monetary indicators?

  • Lars E.O. Svensson

    (Princeton University - Department of Economics)

  • Stefan Gerlach

This paper studies the relationship between inflation, output, money and interest rates in the euro area, using data spanning 1980-2000. The P model is shown to have considerable empirical support. Thus, the "price gap" or, equivalently, the "real money gap" (the gap between current real balances and long-run equilibrium real balances), has substantial predictive power for future inflation. The real money gap contains more information about future inflation than the output gap and the Eurosystem's money-growth indicator (the gap between current M3 growth and a reference value). The results suggest that the Eurosystem's money-growth indicator is an inferior indicator of future inflation.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 98.

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Length: 30 pages
Date of creation: Jan 2001
Date of revision:
Handle: RePEc:bis:biswps:98
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