Does stock market uncertainty impair the use of monetary indicators in the euro area?

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Abstract:

The relationship between monetary indicators and inflation is usually assumed to be linear, implying that looser monetary conditions always signal an increase in inflation. Recently, money growth in the euro area surged while inflation remained comparatively subdued. This seems at variance with linearity. At the same time, stock market uncertainty peaked, suggesting that part of the money growth resulted from portfolio adjustment and was hence non-inflationary. A threshold regression model is employed to verify the claim that the impact of monetary indicators on future inflation varies conditional on stock price volatility. It is shown that there is limited evidence to support this claim. On the other hand, the results indicate that stock market data may contain useful information regarding future inflation,

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840600903436

Affiliations: Monetary and Economic Policy Division, The Nederlandsche Bank, Amsterdam, Netherlands

Publication date: January 1, 2007

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