Working Paper: CEPR ID: DP8957
Authors: Roberto A. De Santis; Carlo A. Favero; Barbara Roffia
Abstract: This paper argues that a stable broad money demand for the euro area over the period 1980-2011 can be obtained by modelling cross border international portfolio allocation. As a consequence, model-based excess liquidity measures, namely the difference between actual M3 growth (net of the inflation objective) and the expected money demand trend dynamics, can be useful to predict HICP inflation.
Keywords: euro area money demand; inflation forecasts; monetary policy; portfolio allocation
JEL Codes: E4; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| international portfolio allocation (G15) | stability of broad money demand in the euro area (E41) |
| excess liquidity measures (E51) | HICP inflation (E31) |
| positive gap between actual M3 growth and expected trend dynamics (E19) | increase in HICP inflation (E31) |
| fluctuations in international financial markets (F30) | euro area money growth (E49) |