Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/121113
Authors: 
Dreger, Christian
Wolters, Jürgen
Year of Publication: 
2013
Series/Report no.: 
FIW Working Paper 119
Abstract: 
This paper examines the stability of money demand and 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 indi-cators are useful to predict inflation, if the forecasting equations are based on measures of excess liquidity.
Subjects: 
Money demand
excess liquidity
inflation forecasts
JEL: 
C22
C52
E41
Document Type: 
Working Paper

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