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Money and Inflation in the Euro Area: A Case for Monetary Indicators?

  • Stefan Gerlach
  • Lars E.O. Svensson

This paper studies the relationship between inflation, output, money and interest rates in the euro area, using data spanning 1980 2000. The P* model is shown to have considerable empirical support. Thus, the price gap' or, equivalently, the real money gap' (the gap between current real balances and long-run equilibrium real balances), has substantial predictive power for future inflation. The real money gap contains more information about future inflation than the output gap and the Eurosystem's money-growth indicator (the gap between current M3 growth and a reference value). The results suggest that the Eurosystem's money-growth indicator is an inferior indicator of future inflation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8025.

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Date of creation: Dec 2000
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Publication status: published as Gerlach, Stefan and Lars E. O. Svensson. "Money And Inflation In The Euro Area: A Case For Monetary Indicators?," Journal of Monetary Economics, 2003, v50(8,Nov), 1649-1672.
Handle: RePEc:nbr:nberwo:8025
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