Money in an Estimated Business Cycle Model of the Euro Area (original) (raw)

Business cycle, interest rate and money in the Euro Area: a common factor model

2014

In this paper we model and analyse the contemporaneous correlation between interest rate, monetary aggregates, production and prices (of consumer goods, financial assets and real estate) in the Euro Area. To do this, firstly we estimate a common cyclical factor by means of an unobserved component model with the common factor located in variations in the underlying growth rates, that is, in the accelerations and decelerations of the variables. We find that the variables mentioned above share a significant cyclical factor being all procyclical except for narrow money. Finally we offer an explanation of this empirical finding based on the monetary policy strategy of interest rate pegging followed by the European Central Bank. In this regard, the shared cyclical information suggests that (a) inflation should be considered as a phenomenon that affects the whole economy, and therefore all prices, and (b) monetary indicators such as monetary aggregates may contribute to the assessment of inflationary risks throughout the cycle.

Money and Monetary Policy in the Eurozone: An Empirical Analysis During Crises

Macroeconomic Dynamics, 2017

This paper analyzes the role of money and monetary policy as well as the forecasting performance of New Keynesian dynamic stochastic general equilibrium models with and without separability between consumption and money. The study is conducted over three crisis periods in the Eurozone, namely, the ERM crisis, the dot-com crisis, and the global financial crisis (GFC). The results of successive Bayesian estimations demonstrate that during these crises, the nonseparable model generally provides better out-of-sample output forecasts than the baseline model. We also demonstrate that money shocks have some impact on output variations during crises, especially in the case of the GFC. Furthermore, the response of output to a money shock is more persistent during the GFC than during the other crises. The impact of monetary policy also changes during crises. Insofar as the GFC is concerned, this impact increases at the beginning of the crisis, but decreases sharply thereafter.

The Role of Money and Monetary Policy in Crisis Periods: The Euro Area Case

SSRN Electronic Journal, 2000

In this paper, we test two models of the Eurozone, with a special emphasis on the role of money and monetary policy during crises. The role of separability between money and consumption is investigated further and we analyse the Euro area economy during three di¤erent crises: 1992, 2001 and 2007. We …nd that money has a rather signi…cant role to play in explaining output variations during crises whereas, at the same time, the role of monetary policy on output decreases signi…cantly. Moreover, we …nd that a model with non-separability between consumption and money has better forecasting performance than a baseline separable model over crisis periods.

Money demand and the role of monetary indicators in forecasting euro area inflation

International Journal of Forecasting, 2014

This paper examines the forecasting performance of a broad monetary aggregate (M3) in predicting euro area inflation. Excess liquidity is measured as the difference between the actual money stock and its fundamental value, the latter determined by a money demand function. The out-of sample forecasting performance is compared to widely used alternatives, such as the term structure of interest rates. The results indicate that the evolution of M3 is still in line with money demand even in the period of the financial and economic crisis. Monetary indicators are useful to predict inflation at the longer horizons, especially if the forecasting equations are based on measures of excess liquidity. Due to the stable link between money and inflation, central banks should implement exit strategies from the current policy path, as soon as the financial conditions are expected to return to normality.

Should Monetary Policy Respond to Money Growth? New Results for the Euro Area

International Finance, 2010

In recent years, the relevance of money growth indicators for the conduct of monetary policy has been questioned in the mainstream academic literature. It is widely argued that monetary policy should directly relate short-term interest rates to inflation and the output gap. The present paper investigates whether the performance of this type of interest rate rule can be significantly improved by adding a policy response to money growth. In contrast to most previous studies, our analysis explicitly takes into account the fact that real-time data on both actual and potential output, and hence the output gap, may be subject to substantial measurement errors. Broadly speaking, we find that the greater the degree of output gap uncertainty, the greater the benefits of incorporat-The views expressed in this paper are those of the authors and should not be interpreted as those of the Deutsche Bundesbank. We thank Heinz Herrmann, Petra Gerlach-Kristen, two anonymous referees, the participants at the annual congress of the German Economic Association 2008 in Graz as well as of workshops and seminars at the Deutsche Bundesbank, the Oesterreichische Nationalbank, the Schweizer Nationalbank, the universities of Bayreuth, Bochum, Gieen and Leipzig for helpful comments.

Narrow money and the business cycle: theoretical aspects and euro area evidence

This paper analyses the informatio n content of M1 for euro area real GDP since the beginning of the 1980s. After a literature review on the empirical results in individual euro area countries we review some theoretical arguments why real narrow money growth might be an important determinant of cyclical developments in real GDP beyond effects already captured by short-term interest rates. In the empirical part we first present some preliminary evidence on the M1-GDP connection against the background of the situation in the US, based on an approach developed by Hamilton and Kim 2002. This test suggests that compared with the U.S., in the euro area, M1 has better and more robust forecasting properties than the term spread. These properties are also maintained when looking at a broader set of no n-monetary indicator variables. Narrow money therefore seems crucial for cyclical developments. We also evaluate the relative out-of-sample forecasting performance of different classes of VAR models comprising real M1, GDP and further potential leading indicator variables against a univariate benchmark model. As a result, once the information from narrow money is taken into account, what matters more for the forecast performance, is the model class rather than the selection of additional indicators. While within the class of VARs in levels, Bayesian VARs are the best performing models, they are not capable of outperforming the benchmark. Specifically, only VARs in first differences are able to outperform the benchmark model. JEL: E41, E52, E58 ). Parts of this work were written while the two latter authors were consultants for the ECB. We thank seminar participants at the ECB for helpful discussions and suggestions. We are especially grateful to This study reviews the role of narrow money -predominantly real M1 -in terms of leading cyclical conditions in the euro area over the sample period 1981Q1 -2001Q4. It also looks at how important real narrow money growth has been in relation to information already captured by short-term interest rates.

Money in the Inflation Equation: the Euro Area Evidence

2008

The ECB is the only major central bank that still emphasizes the role of money in monetary policy management. In this paper, we bring some support to this approach. Taking into account Euro area data from the period between 1999 and 2007, we demonstrate that a steady 10 per cent increase in M3 may result in an inflation rate of

Money As An Indicator In the Euro Zone

Kiel Working Papers, 2000

This paper attempts to evaluate the information content of money for the forecast of inflation, output, investment and consumption in the euro zone. It considers M1 and M3; a number of modifications to these aggregates is also proposed to enhance their forecast performance. The ...

Narrow Money and the Business Cycle: Theoretical aspects and euro area evdence

2003

This paper analyses the information content of M1 for euro area real GDP since the beginning of the 1980s. After a literature review on the empirical results in individual euro area countries we review some theoretical arguments why real narrow money growth might be an important determinant of cyclical developments in real GDP beyond effects already captured by short-term interest rates. In the empirical part we first present some preliminary evidence on the M1-GDP connection against the background of the situation in the US, based on an approach developed by Hamilton and Kim 2002. This test suggests that compared with the U.S., in the euro area, M1 has better and more robust forecasting properties than the term spread. These properties are also maintained when looking at a broader set of non-monetary indicator variables. Narrow money therefore seems crucial for cyclical developments. We also evaluate the relative out-of-sample forecasting performance of different classes of VAR mod...