Forecasting Real GDP: What Role for Narrow Money?

38 Pages Posted: 22 Jan 2004

See all articles by Claus Brand

Claus Brand

European Central Bank (ECB)

Hans-Eggert Reimers

Hochschule Wismar

Franz Seitz

Technical University of Applied Sciences Weiden

Date Written: September 2003

Abstract

This paper analyses the information content of M1 for euro area real GDP since the beginning of the 1980s and reviews theoretical arguments on why real narrow money should help predict real GDP. We find that, unlike in the U.S., in the euro area, M1 has better and more robust forecasting properties for real GDP than yield spreads. This property persists when one controls for a number of other influences. We also evaluate the out-of-sample forecasting performance of different classes of VAR models comprising real M1, GDP and other indicators, using as benchmark a simple univariate model. As a result, only VARs in first differences are able to outperform the benchmark.

Keywords: Money, business cycle, forecast comparison, VAR models

JEL Classification: E41, E52, E58

Suggested Citation

Brand, Claus and Reimers, Hans-Eggert and Seitz, Franz, Forecasting Real GDP: What Role for Narrow Money? (September 2003). ECB Working Paper No. 254. Available at SSRN: https://ssrn.com/abstract=457344

Claus Brand (Contact Author)

European Central Bank (ECB) ( email )

Eurotower
Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+0049 69 13440 (Phone)
+0044 69 1344 6000 (Fax)

Hans-Eggert Reimers

Hochschule Wismar ( email )

FB Wirtschaft
Philipp-Mueller-Str. PF 1210
23952 Wismar
Germany
49-3841-753-601 (Phone)
49-3841-753-383 (Fax)

Franz Seitz

Technical University of Applied Sciences Weiden ( email )

Hetzenrichter Weg 15
D-92637 Weiden i.d. Opf
Germany
(49) 961-382-1318 (Fax)

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