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Long Run Inflation Indicators – Why the ECB got it Right

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Abstract

This paper studies the issue of whether money contains useful information about future inflation in a panel of nine developed countries. A low frequency estimate of excess money growth is compared to an estimate of the inflation trend following the discussion in Woodford (2007). The empirical analysis shows that money contains more information about future CPI-inflation than an estimate of the inflation trend, and that the output gap has some influence over the medium run movements of inflation, but the effect varies over time. The result is the same for small countries as it is for large countries. Money thus contains information about future headline inflation that the inflation trend does not.

Suggested Citation

  • Andersson, Fredrik N. G., 2008. "Long Run Inflation Indicators – Why the ECB got it Right," Working Papers 2008:17, Lund University, Department of Economics.
  • Handle: RePEc:hhs:lunewp:2008_017
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    File URL: http://project.nek.lu.se/publications/workpap/Papers/WP08_17.pdf
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    Keywords

    Inflation; Money; Inflation Indicators; Wavelet Analysis;

    JEL classification:

    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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