Money Demand Stability and Inflation Prediction in the Four Largest EMU Countries
Title: Money Demand Stability and Inflation Prediction in the Four Largest EMU Countries
Publisher: Blackwell Publishing
Citation: Scottish Journal of Political Economy, 2009, 56, 1, 73-93
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.
Subject: E41; E52; Money demand; stability; money overhang; inflation forecast
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