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(When) does money growth help to predict Euro-area inflation at low frequencies?

Author

Listed:
  • Schreiber, Sven
Abstract
Short answer: It helps a lot when other important variables are excluded from the information set. Longer answer: We revisit claims in the literature that money growth is Granger-causal for inflation at low frequencies. Applying frequency-specific tests in a comprehensive system setup for euro-area data we consider various theoretical predictors of inflation. A general-to-specific testing strategy reveals a recursive structure where only the unemployment rate and long-term interest rates are directly Granger-causal for low-frequency inflation movements, and all variables affect money growth. We therefore interpret opposite results from bivariate inflation/money growth systems as spurious due to omittedvariable biases. We also analyze the resulting four-dimensional system in a cointegration framework and find structural changes in the long-run adjustment behavior, which do not affect the main conclusions, however.

Suggested Citation

  • Schreiber, Sven, 2013. "(When) does money growth help to predict Euro-area inflation at low frequencies?," Discussion Papers 2013/10, Free University Berlin, School of Business & Economics.
    • Handle: RePEc:zbw:fubsbe:201310
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    References listed on IDEAS

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    More about this item

    Keywords

    money growth; granger causality; quantity theory; unemployment;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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