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Which predictor is the best to predict inflation in Europe: the real money-gap or a nominal money based indicator?

  • Gilles Dufrénot

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université Paul Cézanne - Aix-Marseille 3 - Université de la Méditerranée - Aix-Marseille 2 - EHESS - École des hautes études en sciences sociales - CNRS - AMU - Aix-Marseille Université)

  • Roseline Joyeux

    (Macquarie University - University of Sydney)

  • Anne Peguin-Feissolle

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université Paul Cézanne - Aix-Marseille 3 - Université de la Méditerranée - Aix-Marseille 2 - EHESS - École des hautes études en sciences sociales - CNRS - AMU - Aix-Marseille Université)

In the literature, two important views concerning the conduct of monetary policy are construed. One view is that the central banks' monetary policy must be credible if the authorities want to curb inflation. A second view is that central banks set their monetary policy by using all the information relevant for inflation and output projections. In Europe, a controversy has emerged about the role of monetary aggregates as useful indicators of future inflation and output. On one hand, evidence in favour of the usefulness of nominal monetary aggregates as good predictors is provided by the literature. On the other hand, empirical evidence in favour of real money indicators is found. The purpose of this paper is to contribute to the ongoing debate on the role of money aggregates in the setting of monetary policy. The question we are interested in is whether the real money gap contains more information about future inflation in Europe, than an indicator based on the growth rate of nominal money. We use a panel data framework instead of the usual time series methods on aggregate Euro data.

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Date of creation: 18 Jan 2008
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Handle: RePEc:hal:wpaper:hal-00207497
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  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
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  8. Neumann, Manfred J. M. & Greiber, Claus, 2004. "Inflation and core money growth in the euro area," Discussion Paper Series 1: Economic Studies 2004,36, Deutsche Bundesbank, Research Centre.
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  13. Roger Hammersland, 2004. "Who was in the driving seat in Europe during the nineties, International financial markets or the BUBA?," Working Paper 2004/20, Norges Bank.
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