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

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Stefan Gerlach
Hong Kong Monetary Authority

Lars E.O Svensson
Princeton University, CEPR and NBER

First draft: July 1999
This version: May 2003

Journal of Monetary Economics 50 (2003) 1649-1672


This paper examines inflation indicators for the euro area by
studying the relationship between inflation, output, money and interest rates,
using data spanning 1980-2001. The central finding is that both the output gap
and the real money gap (the difference between the real money stock and the
long-run equilibrium real money stock) contain considerable information
regarding future inflation. In contrast, the Eurosystem’s money-growth indicator
(the difference between nominal money growth and a reference value), the
prominent “first pillar” in its monetary strategy, contains little information
about future inflation, and no information beyond that contained in the output
and real money gaps.

The predictive performance of the output gap has improved
compared to that in a previous version of this paper, most likely because of
better estimation methods.

JEL Classification Numbers: E42, E52, E58

Keywords: ECB, Eurosystem, Pstar