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Money demand stability and inflation prediction in the four largest EMU countries

  • Carstensen, Kai
  • Hagen, Jan
  • Hossfeld, Oliver
  • Neaves, Abelardo S.

In this paper, we analyze the money demand functions of the four largest EMU countries and of the four-country (EMU-4) aggregate. We identify reasonable and stable money demand relationships for Germany, France and Spain as well as the EMU-4 aggregate. For the case of Italy, results are less clear. From the estimated money demand functions, we derive both EMU-4 and country-specific measures of money overhang. We find that the EMU-4 overhang measure strongly correlates with the country-specific measures, particularly since the start of EMU, and is useful to predict country-specific inflation. However, it generally does not encompass country-specific money overhang measures as predictors of inflation. Hence, aggregate money overhang is an important, but by far not an exhaustive, indicator for the disaggregate level.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19946.

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Date of creation: 2009
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Publication status: Published in Scottish Journal of Political Economy 1 56(2009): pp. 73-93
Handle: RePEc:lmu:muenar:19946
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