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The Role of Monetary Aggregates in the Policy Analysis of the Swiss National Bank

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  • Gebhard Kirchgässner

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  • Jürgen Wolters

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Abstract

Using Swiss data from 1983 to 2008, this paper investigates whether growth rates of the different measures of the quantity of money and or excess money can be used to forecast inflation. After a preliminary data analysis, money demand relations are specified, estimated and tested. Then, employing error correction models, measures of excess money are derived. Using recursive estimates, indicator properties of monetary aggregates for inflation are assessed for the period from 2000 onwards, with time horizons of one, two, and three years. In these calculations, M2 and M3 clearly outperform M1, and excess money is generally a better predictor than the quantity of money. Taking into account also the most (available) recent observations that represent the first three quarters of the economic crisis, the money demand function of M3 remains stable while the one for M2 is strongly influenced by these three observations. While in both cases forecasts for 2010 show inflation rates inside the target zone between zero and two percent, and the same holds for forecasts based on M3 for 2011, forecasts based on M2 provide evidence that the upper limit of this zone might be violated in 2011.

Suggested Citation

  • Gebhard Kirchgässner & Jürgen Wolters, 2009. "The Role of Monetary Aggregates in the Policy Analysis of the Swiss National Bank," University of St. Gallen Department of Economics working paper series 2009 2009-30, Department of Economics, University of St. Gallen.
  • Handle: RePEc:usg:dp2009:2009-30
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    References listed on IDEAS

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    Cited by:

    1. Sylvia Kaufmann & Samuel Reynard, 2010. "Discussion: The Role of Monetary Aggregates in the Policy Analysis of the Swiss National Bank," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 146(I), pages 255-267, March.
    2. Dreger, Christian & Wolters, Jürgen, 2010. "M3 Money Demand and Excess Liquidity in the Euro Area," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 459-472.
    3. Ramos Francia Manuel & Noriega Antonio E. & Rodríguez-Pérez Cid Alonso, 2015. "The Use of Monetary Aggregates as Indicators of the Future Evolution of Consumer Prices: Monetary Growth and Inflation Target," Working Papers 2015-14, Banco de México.
    4. Noriega Antonio E. & Ramos Francia Manuel & Rodríguez-Pérez Cid Alonso, 2015. "Money demand estimations in Mexico and of its stability 1986-2010, as well as some examples of its uses," Working Papers 2015-13, Banco de México.

    More about this item

    Keywords

    Stability of Money Demand; Monetary Aggregates and Inflation;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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