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

Abstract

In this paper, we analyze the money demand functions of the four largest EMU countries and of the four‐country (EMU‐4) aggregate. We identify reasonable and stable money demand relationships for Germany, France and Spain as well as the EMU‐4 aggregate. For the case of Italy, results are less clear. From the estimated money demand functions, we derive both EMU‐4 and country‐specific measures of money overhang. We find that the EMU‐4 overhang measure strongly correlates with the country‐specific measures, particularly since the start of EMU, and is useful to predict country‐specific inflation. However, it generally does not encompass country‐specific money overhang measures as predictors of inflation. Hence, aggregate money overhang is an important, but by far not an exhaustive, indicator for the disaggregate level.

Monetary Integration, Money-Demand Stability, and the Role of Monetary Overhang in Forecasting Inflation in CEE Countries

“…Currency substitution is demonstrated to relate the money demand to the interest rate spread between the CEE countries and the Euro Area, plus the 6 The M3 aggregate is represented by the broad money index (2010 = 100) and comes from the OECD database. Bruggeman et al (2003), Carstensen et al (2009), and Dreger and Wolters, (2014) used the M3 aggregate to check the stability of money demand in the Euro Area. The level of prices (consumer price index -2010 =100) and the real industrial production index (2010 = 100) comes from IMF"s -International Financial Statistics database.…”

“…A positive monetary overhang is a sign of inflationary pressure. If, for example, the money demand proves to be unstable, this will bias the inflation forecasting results (Carstensen et al 2009). Monetary Integration, Money-Demand Stability, and the Role of Monetary Overhang in Forecasting Inflation in CEE Countries jei 845 overhang represents a reliable predictor of inflation in CEE countries after EU accession.Our focus is on the advanced CEE countries for two reasons.…”

“…A positive monetary overhang is a sign of inflationary pressure. If, for example, the money demand proves to be unstable, this will bias the inflation forecasting results (Carstensen et al 2009).…”

The role of monetary aggregates in the policy analysis of the swiss national bank

“…The importance of money growth and/or excess money measures has been discussed in various papers: see, for example, Baltensperger et al (2001), Jordan et al (2001), Reynard (2007) 2 for Switzerland, Trecroci and Vega (2002), Gerlach and Svensson (2003), Hofmann (2006), Kaufmann and Kugler (2008), as well as Carstensen et al (2009) for the euro area, and Nelson (2003) as well as Estrella and Mishkin (1997) for the US. Reynard (2007) showed that M2 excess liquidity is able to assess policy stance as well as potential inflation and output developments in Switzerland.…”

Money and credit overhang in the euro area

“…Dedola et al (2001) compare aggregate and national money demand estimations in the pre-euro era. Carstensen et al (2009) compare money demand dynamics for the euro area (EMU) as a whole with that of its four largest member countries, Germany, France, Italy, and Spain. Nautz andRondorf (2011), Setzer, van den Noord andWolff (2011) and Setzer and Wolff (2013) perform a panel analysis where variables are defined in deviation of the euro area mean.…”