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The Link of the Monetary Indicator to Future Inflation in the Euro Area � A Simulation Experiment

  • Jan Gottschalk
  • Stéphanie Stolz

We examine the indicator property of the monetary indicator for inflation. Using a P*-model, Svensson shows theoretically in a recent paper that the relationship between these two variables is rather tenuous. The present study employs empirical evidence on the relations in his model to quantify its dynamics for the euro area. Moreover, we extend SvenssonÂ’s analysis by considering different shocks and monetary regimes. It becomes apparent that the system exhibits complicated dynamics and that for most shocks and policy regimes the monetary indicator is not a leading indicator of dangers to price stability in the medium term.

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File URL: https://www.ifw-members.ifw-kiel.de/publications/the-link-of-the-monetary-indicator-to-future-inflation-in-the-euro-area-a-simulation-experiment/kap1057.pdf
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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1057.

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Length: 42 pages
Date of creation: Jul 2001
Date of revision:
Handle: RePEc:kie:kieliw:1057
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  1. Alberto Cabrero & Juan L. Escrivá & Emilio Muñoz & Juan Peñalosa, 1998. "The Controllability of a Monetary Aggregate in EMU," Banco de Espa�a Working Papers 9817, Banco de Espa�a.
  2. Brand, Claus & Cassola, Nuno, 2000. "A money demand system for euro area M3," Working Paper Series 0039, European Central Bank.
  3. Svensson, Lars, 1999. "Does the P* Model provide Any Rationale for Monetary Targeting?," Seminar Papers 671, Stockholm University, Institute for International Economic Studies.
  4. G. Coenen & J.-L. Vega, 2001. "The demand for M3 in the euro area," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(6), pages 727-748.
  5. Lars E. O. Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," NBER Working Papers 5797, National Bureau of Economic Research, Inc.
  6. Bennett T. McCallum, . "Recent Developments in monetary policy analysis: The roles of theory and evidence," GSIA Working Papers 1999-12, Carnegie Mellon University, Tepper School of Business.
  7. Elke Hahn & Christian Müller, 2000. "Money Demand in Europe: Evidence from the Past," Discussion Papers of DIW Berlin 204, DIW Berlin, German Institute for Economic Research.
  8. Gerlach, Stefan & Smets, Frank, 1999. "Output gaps and monetary policy in the EMU area1," European Economic Review, Elsevier, vol. 43(4-6), pages 801-812, April.
  9. Gerlach, Stefan & Svensson, Lars E. O., 2003. "Money and inflation in the euro area: A case for monetary indicators?," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1649-1672, November.
  10. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  11. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1, October.
  12. Joachim Scheide & Mathias Trabandt, 2000. "Predicting Inflation in Euroland ; The Pstar Approach," Kiel Working Papers 1019, Kiel Institute for the World Economy.
  13. P.J.G. Vlaar & H. Schuberth, 1998. "Monetary transmission and controllability of money in Europe: a structural vector error correction approach," WO Research Memoranda (discontinued) 544, Netherlands Central Bank, Research Department.
  14. Trecroci, Carmine & Vega, Juan Luis, 2000. "The information content of M3 for future inflation," Working Paper Series 0033, European Central Bank.
  15. Nicoletti-Altimari, Sergio, 2001. "Does money lead inflation in the euro area?," Working Paper Series 0063, European Central Bank.
  16. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-58, September.
  17. Jan Gottschalk & Felipe Martinez Rico & Willem Van Zandweghe, 2000. "Money as an Indicator in the Euro Zone," Kiel Working Papers 984, Kiel Institute for the World Economy.
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