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The Information Content of Money in Forecasting Euro Area Inflation

Author/Editor: Berger, Helge | Stavrev, Emil
Authorized for Distribution: July 1, 2008
Electronic Access: Free Full Text (PDF file size is 745KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: This paper contributes to the debate on the role of money in monetary policy by analyzing the information content of money in forecasting euro-area inflation. We compare the predictive performance within and among various classes of structural and empirical models in a consistent framework using Bayesian and other estimation techniques. We find that money contains relevant information for inflation in some model classes. Money-based New Keynesian DSGE models and VARs incorporating money perform better than their cashless counterparts. But there are also indications that the contribution of money has its limits. The marginal contribution of money to forecasting accuracy is often small, money adds little to dynamic factor models, and it worsens forecasting accuracy of partial equilibrium models. Finally, non-monetary models dominate monetary models in an all-out horserace.
 
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Series: Working Paper No. 08/166
Subject(s): Euro Area | Money | Inflation | Forecasting models | Monetary policy | Economic models
Author's keyword(s): Information content of money | inflation forecasting | New Keynesian model | DSGE model | P* model | Two-pillar Phillips curve | VAR model | general dynamic factor model | Bayesian estimation | euro area
 
English  
    Published:   July 1, 2008        
            Format:   Paper
    Stock No:   WPIEA2008166   Pages:   29
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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