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Money Demand Stability and Inflation Prediction in the Four Largest EMU Countries

  • Kai Carstensen
  • Jan Hagen
  • Oliver Hossfeld
  • Abelardo Salazar Neaves

In this paper we analyze the money demand functions of the four largest EMU countriesand of the four-country (EMU-4) aggregate. We identify reasonable and stable moneydemand relationships for Germany, France and Spain as well as the EMU-4 aggregate.For the case of Italy, results are less clear. From the estimated money demand functions,we derive both EMU-4 and country-specific measures of money overhang. We find thatthe EMU-4 overhang measure strongly correlates with the country-specific measures,particularly since the start of EMU, and is useful to predict country-specific inflation.However, it generally does not encompass country-specific money overhang measuresas predictors of inflation. Hence, aggregate money overhang is an important, but by farnot an exhaustive, indicator for the disaggregate level.

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Paper provided by Ifo Institute for Economic Research at the University of Munich in its series Ifo Working Paper Series with number Ifo Working Paper No. 61.

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Date of creation: 2008
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Handle: RePEc:ces:ifowps:_61
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