Core ERM Money Demand and Effects on Inflation

Abstract

The paper presents evidence supporting the existence of a stable money demand relationship for Germany plus a core group of countries—France, Belgium, Denmark, Luxembourg and the Netherlands—that have not realigned their parities against the deutschmark since at least 1987. The predictive power of the core ERM aggregate for French and German inflation is also examined; it is shown that the ERM aggregate is a better predictor of German inflation than the German monetary aggregate alone. Thus, the ERM money supply is a useful indicator for German monetary policy, even if the latter only focuses on achieving domestic inflation targets.

Money Demand Stability and Inflation Prediction in the Four Largest Emu Countries

“…While this is, again, only one test out of six, it is more worrisome because the recursive F tests on which the SupF test is based start to rise at the sample end and, hence, indicate that the instability occurred recently and may even be related to the start of the EMU. On the other hand, the parameter estimates are reasonable and compare well with findings in the literature (e.g., Cassard et al, 1997). We will come back to this issue when the forecasting potential of the French money overhang in the EMU sample is assessed.…”

The Stability of Emu‐wide Money Demand Functions and the Monetary Policy Strategy of the European Central Bank

“…However, because of the small di¡erences in the resulting country shares and because of the high correlation between the growth rates of the two series, we do not expect this alternative aggregation method to have any signi¢cant e¡ect on the EMU-wide money demand estimates. We did not use current exchange rates as Monticelli and Strauss-Kahn (1993) and Monticelli and Papi (1996) did or current PPP exchange rates as Cassard et al (1997) did because these aggregation methods would result in a double de£ation of the nominal variables if we assume that the PPP theory holds. This would imply that high in£ation countries have a depreciating or devaluing currency and therefore a decreasing share in the real EMU data.…”

“…The harmonized broad monetary aggregate M3H was introduced by the Committee of Governors of the Central Banks in 1991 as the main monetary indicator for the European countries (Committee of Governors, Monticelli (1996), Monticelli and Papi (1996) and Wesche (1997). Fase and Winder (1993), Monticelli and Strauss-Kahn (1993) and Cassard et al (1994Cassard et al ( , 1997 use an M3 measure of money that is corrected for international di¡erences in de¢nition. The main disadvantage of the harmonized broad monetary aggregate M3H, however, is its geographical inconsistency, which is even more important than for the narrow monetary aggregate M1 since it applies to a much larger part of the monetary aggregate.…”

Estimating A European Demand For Money

“…Fair (1987) gives an older but extensive comparison of money demand estimates involving 27 countries, including EU members. Cassard, Lane and Masson (1997) show, additionally to providing money demand estimates for some EU countries, that a European monetary aggregate improves the prediction of German inflation compared to using a German aggregate.…”