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
337 International economics 339 Macroeconomics and related topics
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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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