Scandinavian Working Papers in Economics
Working Paper Series,
Uppsala University, Department of Economics
No 2007:30: Does Money Growth Granger-Cause Inflation in the Euro Area? Evidence from Out-of-Sample Forecasts Using Bayesian VARs
Helge Berger () and Pär Österholm ()
Additional contact information
Helge Berger: Department of Economics, Free University Berlin, Postal: Department of Economics, Free University Berlin, Boltzmannstr. 20, 14195 Berlin, Germany
Pär Österholm: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Abstract: We use a mean-adjusted Bayesian VAR model as an out-of-sample forecasting tool to test whether money growth Granger-causes inflation in the euro area. Based on data from 1970 to 2006 and forecasting horizons of up to 12 quarters, there is surprisingly strong evidence that including money improves forecasting accuracy. The results are very robust with regard to alternative treatments of priors and sample periods. That said, there is also reason not to overemphasize the role of money. The predictive power of money growth for inflation is substantially lower in more recent sample periods compared to the 1970s and 1980s. This cautions against using money-based inflation models anchored in very long samples for policy advice.
Keywords: Granger Causality; Monetary Aggregates; Monetary Policy; European Central Bank
32 pages, December 17, 2007
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