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Is core money growth a good and stable inflation predictor in the euro area?

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  • Carstensen, Kai

Abstract

In this paper, it is analyzed whether core money growth helps to predict future inflation in a useful and reliable way. Using an out-of-sample forecasting exercise and a stability analysis, it is shown that core money growth carries important information not contained in the inflation history, that its inclusion in a forecasting model can increase the forecasting accuracy, and that it has had a strong and stable long-run link to inflation over the last decades. A particularly promising forecasting model at all horizons is the one proposed by Gerlach (2004) that includes the inflation gap, the difference between core money growth and core inflation, and the output gap. This model has a very good track record, exhibits stable parameters over both the pre-EMU and the EMU era. What makes it appealing from a more theoretical perspective is that it relies on the stable long-run relationship between money growth and inflation.

Suggested Citation

  • Carstensen, Kai, 2007. "Is core money growth a good and stable inflation predictor in the euro area?," Kiel Working Papers 1318, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1318
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    Cited by:

    1. Arratibel, Olga & Leiner-Killinger, Nadine & Kamps, Christophe, 2009. "Inflation forecasting in the new EU Member States," Working Paper Series 1015, European Central Bank.
    2. Cendejas Bueno, José Luis & Castañeda, Juan Enrique & Muñoz, Félix, 2015. "Business cycles and monetary regimes in the U.S. (1960 – 2014): A plea for monetary stability," Working Papers in Economic Theory 2015/05, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
    3. Hofmann, Boris, 2009. "Do monetary indicators lead euro area inflation?," Journal of International Money and Finance, Elsevier, vol. 28(7), pages 1165-1181, November.
    4. Döhrn, Roland & Schmidt, Christoph M. & Zimmermann, Tobias, 2008. "Inflation Forecasting with Inflation Sentiment Indicators," Ruhr Economic Papers 80, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    5. Gern, Klaus-Jürgen & Oskamp, Frank & Sander, Birgit & Scheide, Joachim, 2007. "Robuste weltwirtschaftliche Expansion," Open Access Publications from Kiel Institute for the World Economy 4001, Kiel Institute for the World Economy (IfW Kiel).
    6. Sylvia Kaufmann & Peter Kugler, 2010. "A monetary real-time conditional forecast of euro area inflation," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 29(4), pages 388-405.
    7. Carlo Rosa, 2009. "Forecasting the Direction of Policy Rate Changes: The Importance of ECB Words," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 38(1‐2), pages 39-66, February.
    8. Carstensen, Kai & Gern, Klaus-Jürgen & Scheide, Joachim, 2007. "Konjunktur im Euroraum außerhalb Deutschlands bleibt aufwärts gerichtet," Open Access Publications from Kiel Institute for the World Economy 4002, Kiel Institute for the World Economy (IfW Kiel).
    9. Projektgruppe Gemeinschaftsdiagnose, 2007. "Upswing interrupted," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 60(20), pages 03-58, October.
    10. Czudaj, Robert, 2011. "P-star in times of crisis - Forecasting inflation for the euro area," Economic Systems, Elsevier, vol. 35(3), pages 390-407, September.
    11. Mandler, Martin & Scharnagl, Michael, 2014. "Money growth and consumer price inflation in the euro area: A wavelet analysis," Discussion Papers 33/2014, Deutsche Bundesbank.
    12. Sylvia Kaufmann, 2007. "Capturing the Link between M3 Growth and Inflation in the Euro Area – An Econometric Model to Produce Conditional Inflation Forecasts," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 93-108.
    13. Cendejas, José Luis & Castañeda, Juan E. & Muñoz, Félix-Fernando, 2014. "Business cycle, interest rate and money in the euro area: A common factor model," Economic Modelling, Elsevier, vol. 43(C), pages 136-141.
    14. Roland Döhrn & Christoph M. Schmidt & Tobias Zimmermann, 2008. "Inflation Forecasting with Inflation Sentiment Indicators," Ruhr Economic Papers 0080, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    15. repec:zbw:rwirep:0080 is not listed on IDEAS
    16. Benner, Joachim & Gern, Klaus-Jürgen & Kamps, Christophe & Kamps, Annette & Sander, Birgit & Scheide, Joachim, 2004. "Weltwirtschaft im Aufschwung," Open Access Publications from Kiel Institute for the World Economy 3213, Kiel Institute for the World Economy (IfW Kiel).
    17. Dovern, Jonas & Gern, Klaus-Jürgen & Meier, Carsten-Patrick & Oskamp, Frank & Sander, Birgit & Scheide, Joachim, 2007. "Weltkonjunktur verliert an Fahrt," Open Access Publications from Kiel Institute for the World Economy 4093, Kiel Institute for the World Economy (IfW Kiel).
    18. Hayat, Zafar & Balli, Faruk & Rehman, Muhammad, 2017. "The relevance and relative robustness of sources of inflation bias in Pakistan," Economic Modelling, Elsevier, vol. 63(C), pages 283-303.

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    More about this item

    Keywords

    Forecasting; core money growth; stability; filter;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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