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

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  • Stefan Gerlach
  • Lars E.O. Svensson

Abstract

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.

Suggested Citation

  • Stefan Gerlach & Lars E.O. Svensson, 2000. "Money and Inflation in the Euro Area: A Case for Monetary Indicators?," NBER Working Papers 8025, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:8025
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    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

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