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Does Money Help Predict Inflation? An Empirical Assessment for Central Europe

  • Roman Horvath
  • Lubos Komarek
  • Filip Rozsypal

This paper investigates the predictive ability of money for future inflation in the Czech Republic, Hungary, Poland, and Slovakia. We construct monetary indicators similar to those the ECB regularly uses for monetary analysis. We find some in-sample evidence that money matters for future inflation at the policy horizons that central banks typically focus on, but our pseudo out-of-sample forecasting exercise shows that money does not in general improve the inflation forecasts vis-Ã -vis some benchmark models, such as the autoregressive process. Since at least some models containing money improve the inflation forecasts in certain periods, we argue that money still serves as a useful cross-check for monetary policy analysis.

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Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2010/05.

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Date of creation: Dec 2010
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Handle: RePEc:cnb:wpaper:2010/05
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