Which predictor is the best to predict inflation in Europe

the real money-gap or a nominal money based indicator?

Gilles Dufrénot, Roselyne Joyeux, Anne Péguin-Feissolle

Research output: Contribution to journalArticle

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.
Original languageEnglish
Pages (from-to)1-25
Number of pages25
JournalMacquarie economics research papers
Volume2006
Issue number6
Publication statusPublished - 2006

Keywords

  • monetary policy
  • inflation
  • panel data

Fingerprint Dive into the research topics of 'Which predictor is the best to predict inflation in Europe: the real money-gap or a nominal money based indicator?'. Together they form a unique fingerprint.

Cite this