Juergen Wolters

Long Memory in Inflation Rates: International Evidence

We examine monthly inflation rates of five industrial countries. The application of tests against stationarity as well as tests against a unit root yield contradictory results. Thus fractional integration allowing for long memory is a plausible model. We discuss and apply the periodogram regression to estimate the difference parameters. For all countries we find estimates significantly different from 1 as well as from 0. This is evidence in favor of long memory. Specification tests and maximum likelihood estimates support the fitted models. Finally, we relate our empirical results to the construction of the data.

On the power of unit root tests against fractional alternatives

Abstract We investigate the probability of rejecting the I(1) hypothesis when unit root tests are applied to fractionally integrated time series. Especially the augmented Dickey-Fuller test performs poorly. Our analytical arguments are supported by Monte Carlo experiments.

Comparison of Bootstrap Confidence Intervals for Impulse Responses of German Monetary Systems

It is argued that standard impulse response analysis based on vector autoregressive models has a number of shortcomings. Although the impulse responses are estimated quantities, measures for sampling variability such as confidence intervals are often not provided. If confidence intervals are given they are often based on bootstrap methods with poor theoretical properties. These problems are illustrated using two German monetary systems. Proposals are made for improving current practice. Special emphasis is placed on systems with cointegrated variables.

Investigating Stability and Linearity of a German M1 Money Demand Function

Starting from a linear error correction model (ECM) the stability and linearity of a German M1 money demand function are investigated, applying smooth transition regression techniques. Using seasonally unadjusted quarterly data from 1961(1) to 1990(2) it is found that the money demand equation considered is both linear and stable. After extending the sampling period until 1995(4) a clear structural instability due to the monetary unification on 1 July 1990 is found and subsequently modelled. A non-linear specification for the extended period is presented and discussed.

Modeling the Demand for M3 in the Unified Germany

An error correction model for the demand for real M3 money is constructed for the period of 19761994 with real GNP, the GNP deflator, as well as a short-term and a long-term interest rate as explanatory variables. Quarterly, seasonally unadjusted data are used in estimating the model. It is found that there is a clear structural break due to the German unification in 1990. On the other hand, once this structural break is accounted for, a stable relation is found which resists a series of specification tests. These include a number of recent tests of parameter constancy and linearity. Our specification is at variance with findings reported by some other researchers, notably the Deutsche Bundesbank.

The Transmission of German Monetary Policy in the Pre-Euro Period

A small macroeconomic model is constructed to study the transmission of the monetary policy conducted by the Deutsche Bundesbank (DBB) since the middle of the 1970s. For this purpose quarterly, seasonally unadjusted data for the period from 1975 to 1998 are used, that is, the period until the introduction of the Euro is considered. A vector error correction model is constructed for the German monetary sector based on M3, GNP, an inflation rate, a long-term interest rate and a short-term rate which represents the policy variable of the DBB. Moreover, import price inflation is included as an exogenous variable to capture foreign effects. An impulse response analysis highlights the effects of changes in the short-term interest rate and shows the interaction of the main variables of the monetary sector.

The Role of Monetary Aggregates in the Policy Analysis of the Swiss National Bank

SummaryUsing Swiss data from 1983 to 2008, this paper investigates whether growth rates of the different measures of the quantity of money and or excess money can be used to forecast inflation. After a preliminary data analysis, money demand relations are specified, estimated and tested. Then, employing error correction models, measures of excess money are derived. Using recursive estimates, indicator properties of monetary aggregates for inflation are assessed for the period from 2000 onwards, with time horizons of one, two, and three years. In these calculations, M2 and M3 clearly outperform M1, and excess money is generally a better predictor than the quantity of money. Taking into account also the most (available) recent observations that represent the first three quarters of the economic crisis, the money demand function of M3 remains stable while the one for M2 is strongly influenced by these three observations. While in both cases forecasts for 2010 show inflation rates inside the target zone between zero and two percent, and the same holds for forecasts based on M3 for 2011, forecasts based on M2 provide evidence that the upper limit of this zone might be violated in 2011.

Money velocity and asset prices in the euro area

Monetary growth in the euro area has exceeded its target since several years. At the same time, the money demand function seems to be increasingly unstable if more recent data are used. If the link between money balances and the macroeconomy is fragile, the rationale of monetary aggregates in the ECB strategy has to be doubted. In fact, a rise in the income elasticity after 2001 can be observed, and may reflect the exclusion of real and financial wealth in conventional specifications of money demand. This presumption is explored by means of a cointegration analysis. To separate income from wealth effects, the specification in terms of money velocity is preferred. Evidence for the presence of wealth in the long run relationship is provided. In particular, both stock and house prices have exerted a negative impact on velocity after 2001 and lead to almost identical equilibrium errors. The extended error correction model is stable over the entire sample period and survive a battery of specification tests.

Interest Rate Linkages in Europe before and after the Introduction of the European Monetary System: Some Empirical Results

In this paper, possible interest rate linkages between the U.S. and Europe and within Europe are investigated with special reference to the EMS. We use three-month domestic money market rates from 1974 to 1979, from 1983 to 1989, and from 1990 to 1994 for Belgium, France, Germany, Italy, the Netherlands, Switzerland, the U.K., and the U.S. For all periods, we find a strong German influence on the development in the other European countries and, for the first two periods, at best a very weak direct influence from the U.S. However, Germany does not dominate the other countries totally. There are significant relations between the EMS member countries which are not influenced by Germany, and there are relations to other EMS members than Germany from outside this system.Revised Version, March 1995. — Earlier versions of this paper wer presented at seminars at the Universities of Zürich, Bielefeld and Leuven, and at the Konstanzer Seminar on Monetary Theory and Monetary Policy. We thank the participants of these seminars as well as two anonymous referees for helpful comments and suggestions. — We gratefully acknowledge financial support from the Deutsche Forschungsgemeinschaft by Grant No. 322 147. We thank Wilhelm-Johannes Jaenicke for performing the computations and Anna Rushing-Jungeilges for editing the paper in English.

Money demand and the role of monetary indicators in forecasting euro area inflation

This paper examines 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 indicators are useful to predict inflation at the longer horizons, especially if the forecasting equations are based on measures of excess liquidity. Due to the stable link between money and inflation, central banks should implement exit strategies from the current policy path, as soon as the financial conditions are expected to return to normality.