ERM Money Supplies and the Transition to EMU

IMF Working Papers, January 1, 1994

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Stage 2 of monetary union in the Europe is to involve greater monetary cooperation.
The paper examines using the M3 money supply aggregated across “core ERM” countries—those with low inflation and absence of realignments—as a vehicle for that cooperation.
Authors: Paul R Masson, Marcel Cassard, Timothy D. Lane.
Date: January 1, 1994.

Verification of a satisfactory long-run money demand relationship and short-run dynamic equation for the core-ERM M3 aggregate.
Comparison of resulting demand equations’ econometric properties with those for France and Germany separately.
Examination of the predictive power of the core-ERM aggregate relative to French and German inflation.

The resulting demand equations for the core-ERM aggregate have at least as satisfactory econometric properties as those for France and Germany separately.
The core-ERM M3 aggregate helps to predict German inflation, over and above the predictive power of German M3.
Core-ERM M3 therefore has value as an indicator for the anchor country in hitting its own domestic objective, separate from concerns about economic developments in neighboring countries.

Using a core-ERM aggregated M3 can serve as a vehicle for greater monetary cooperation in Stage 2 of EMU.
The predictive relationship between core-ERM M3 and German inflation supports the use of aggregate monetary indicators in anchoring domestic inflation objectives.