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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. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1.
  2. Svensson, L-E-O, 1996. "Inflation Forecast Targeting : Implementaing and Monitoring Inflation Targets," Papers 615, Stockholm - International Economic Studies.
  3. Lars E.O. Svensson & Stefan Gerlach, 2001. "Money and inflation in the Euro Area: A case for monetary indicators?," BIS Working Papers 98, Bank for International Settlements.
  4. Bennett T. McCallum, 2002. "Recent developments in monetary policy analysis: the roles of theory and evidence," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 67-96.
  5. 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.
  6. Müller, Christian & Hahn, Elke, 2000. "Money demand in Europe: Evidence from the past," SFB 373 Discussion Papers 2000,35, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  7. Svensson, Lars E O, 1999. "Does the P* Model Provide Any Rationale for Monetary Targeting?," CEPR Discussion Papers 2198, C.E.P.R. Discussion Papers.
  8. Brand, Claus & Cassola, Nuno, 2000. "A money demand system for euro area M3," Working Paper Series 0039, European Central Bank.
  9. 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.
  10. Nicoletti-Altimari, Sergio, 2001. "Does money lead inflation in the euro area?," Working Paper Series 0063, European Central Bank.
  11. van Zandweghe, Willem & Martinez Rico, Felipe & Gottschalk, Jan, 2000. "Money as an Indicator in the Euro Zone," Kiel Working Papers 984, Kiel Institute for the World Economy (IfW).
  12. Trecroci, Carmine & Vega, Juan Luis, 2000. "The information content of M3 for future inflation," Working Paper Series 0033, European Central Bank.
  13. 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.
  14. Scheide, Joachim & Trabandt, Mathias, 2000. "Predicting inflation in Euroland: the Pstar approach," Kiel Working Papers 1019, Kiel Institute for the World Economy (IfW).
  15. 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.
  16. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  17. Alberto Cabrero & Juan L. Escrivá & Emilio Muñoz & Juan Peñalosa, 1998. "The Controllability of a Monetary Aggregate in EMU," Working Papers 9817, Banco de España;Working Papers Homepage.
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