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

Gerlach, Stefan; Svensson, Lars E. O.

doi:10.2139/ssrn.849045

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

BIS Working Paper No. 98

30 Pages Posted: 13 Dec 2005

See all articles by Stefan Gerlach

Stefan Gerlach

Central Bank of Ireland; Centre for Economic Policy Research (CEPR)

Lars E. O. Svensson

Stockholm School of Economics; Stockholm University - Institute for International Economic Studies (IIES); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

There are 3 versions of this paper

Date Written: January 2001

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.

Keywords: ECB, Eurosystem, Pstar

JEL Classification: E42, E52, E58

Suggested Citation: Suggested Citation

Gerlach, Stefan and Svensson, Lars E.O., Money and Inflation in the Euro Area: A Case for Monetary Indicators? (January 2001). BIS Working Paper No. 98, Available at SSRN: https://ssrn.com/abstract=849045 or http://dx.doi.org/10.2139/ssrn.849045