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Which Predictor is the Best to Predict Inflation in Europe: the Real Money-gap or a Nominal Money Based Indicator?

Author

Listed:
  • Gilles Dufrénot
  • Roselyne Joyeux

    () (Department of Economics, Macquarie University)

  • Anne Péguin-Feissolle

Abstract

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.

Suggested Citation

  • Gilles Dufrénot & Roselyne Joyeux & Anne Péguin-Feissolle, 2006. "Which Predictor is the Best to Predict Inflation in Europe: the Real Money-gap or a Nominal Money Based Indicator?," Research Papers 0606, Macquarie University, Department of Economics.
  • Handle: RePEc:mac:wpaper:0606
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    References listed on IDEAS

    as
    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
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    3. Nelson, Edward, 2002. "Direct effects of base money on aggregate demand: theory and evidence," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 687-708, May.
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    More about this item

    Keywords

    monetary policy; inflation; panel data;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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