nep-eec New Economics Papers
on European Economics
Issue of 2007‒09‒30
twenty-two papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Heterogeneous expectations, learning and European inflation dynamics By Weber, Anke
  2. Do real interest rates converge? Evidence from the European Union By Arghyrou, Michael G; Gregoriou, Andros; Kontonikas, Alexandros
  3. Money and housing: evidence for the euro area and the US By Greiber, Claus; Setzer, Ralph
  4. Evaluation and comparison of European countries: public opinion on services By Pier Alda Ferrari; Paola Annoni; Giancarlo Manzi
  5. Cross-Country Variation in Obesity Patterns among Older Americans and Europeans By Pierre-Carl Michaud; Arthur van Soest; Tatiana Andreyeva
  6. Money in monetary policy design under uncertainty: the Two-Pillar Phillips Curve versus ECB-style cross-checking By Beck, Günter W.; Wieland, Volker
  7. Does a 'Two-Pillar Phillips Curve' Justify a Two-Pillar Monetary Policy Strategy? By Woodford, Michael
  8. Persistence in health limitations: a European comparative analysis By Cristina Hernández-Quevedo; Andrew M. Jones; Nigel Rice
  9. The market value of patents and R&D: Evidence from European firms By Bronwyn H. Hall; Grid Thoma; Salvatore Torrisi
  10. The Unbundling Regime for Electricity Utilities in the EU: A Case of Legislative and Regulatory Capture? By Silvester van Koten; Andreas Ortmann
  11. Households’ Saving and Debt in Italy By Tullio Jappelli; Mario Padula
  12. Structure and performance of the services sector in transition economies By Fernandes, Ana M.
  13. The sustainable enterprise. The multi-fiduciary perspective to the EU sustainability strategy By Giuseppe Danese
  14. Pension Reform, Ownership Structure, and Corporate Governance: Evidence from Sweden By Giannetti, Mariassunta; Laeven, Luc
  15. The rationality and reliability of expectations reported by British households: micro evidence from the British household panel survey By Mitchell, James; Weale, Martin R.
  16. The Demographic Challenge of the Interconnected Education and Pension System in the Czech Republic By Sergey Slobodyan; Viatcheslav Vinogradov
  17. Hierarchical contracting in grant decisions: ex-ante and ex-post evaluation in the context of the EU Structural Funds. By Michela Cella; Massimo Florio
  18. Corporate marginal tax rate, tax loss carryforwards and investment functions: empirical analysis using a large German panel data set By Ramb, Fred
  19. Growth in Britain By Bill Allen; Esther Baroudy; Richard Batley; Bruno Paulson; Peter Sinclair
  20. Consumer credit in Italy. Diffusion and territorial differences. By Daniela Vandone
  21. Investing back home : return migration and business ownership in Albania By Zezza, Alberto; Davis, Benjamin; Carletto, Gero; Kilic, Talip
  22. Real-time Prediction with UK Monetary Aggregates in the Presence of Model Uncertainty By Anthony Garratt; Gary Koop; Emi Mise; Shaun P Vahey

  1. By: Weber, Anke
    Abstract: This paper is the first attempt to investigate the performance of different learning rules in fitting survey data of household and expert inflation expectations in five core European economies (France, Germany, Italy, Netherlands and Spain). Overall it is found that constant gain learning performs well in out-of-sample forecasting. It is also shown that households in high inflation countries are using higher best fitting constant gain parameters than those in low inflation countries. They are hence able to pick up structural changes faster. Professional forecasters update their information sets more frequently than households. Furthermore, household expectations in the Euro Area have not converged to the inflation goal of the ECB, which is to keep inflation below to but close to 2% in the medium run. This contrasts the findings for professional experts, which seem to be more inclined to incorporate the implications of monetary union for the convergence in inflation rates into their expectations.
    Keywords: Monetary policy, heterogeneous expectations, adaptive learning, survey expectations
    JEL: D84 E31 E37
    Date: 2007
  2. By: Arghyrou, Michael G (Cardiff Business School); Gregoriou, Andros; Kontonikas, Alexandros
    Abstract: We test for real interest parity (RIP) in the EU25 area. Our contribution is two-fold: First, we account for the previously overlooked effects of structural breaks on real interest rate differentials. Second, we test for RIP against the EMU average. For the majority of our sample countries we obtain evidence of real interest rate convergence towards the latter. Convergence, however, is a gradual process subject to structural breaks, typically falling close to the launch of the euro. Our findings have important implications relating to the single monetary policy and the progress new EU members have achieved towards joining the euro.
    Keywords: real interest rate parity; convergence; structural breaks; EU; EMU;
    JEL: F21 F32 C15 C22
    Date: 2007–09
  3. By: Greiber, Claus; Setzer, Ralph
    Abstract: This paper examines the relation between money and housing variables in the euro area and in the US. Our empirical model is based on a standard money demand relation which is augmented by housing market variables. In doing so, co-integrated money demand relationships can be established for both the euro area and the US. Furthermore, we find evidence for asset inflation channels, that is, liquidity fuels housing market developments.
    Keywords: money demand, asset inflation, housing, wealth
    JEL: E41 E52
    Date: 2007
  4. By: Pier Alda Ferrari (University of Milan, Department of Economics, Business and Statistics); Paola Annoni (University of Milan, Department of Economics, Business and Statistics); Giancarlo Manzi (university of Milan, Department of Economics, Business and Statistics)
    Abstract: We propose the setting-up of an indicator for classifying European countries with relation to consumers' satisfaction for services of general interest. Services considered are fixed telephone service, electricity supply, railways and postal service. The reference data set is the 2002 Standard Eurobarometer database (EB58) and it refers to EU members before 2004 enlargement. The proposed indicator is based on nonlinear principal component analysis and supplies a measure for the citizen's satisfaction. Its robustness is verified by a Monte Carlo approach. The level of satisfaction is eventually used for country comparison and for detecting possible hotspots, in order to support decision making policies.
    Keywords: Services of General Interest, Dissatisfaction Index, Nonlinear Principal Component Analysis, Robustness Analysis, Bootstrap Methods,
    Date: 2007–06–26
  5. By: Pierre-Carl Michaud; Arthur van Soest; Tatiana Andreyeva
    Abstract: While the fraction of obese people is not as large in Europe as in the United States, obesity is becoming an important issue in Europe as well. Using comparable data from the Survey of Health, Aging and Retirement in Europe (SHARE) and the Health and Retirement Study in the U.S. (HRS), this paper analyzes the correlates of obesity in the population ages 50 and above, focusing on measures of energy intake and expenditure as well as socio-economic status. The main results are as follows: 1) Obesity rates differ substantially on both sides of the Atlantic and across European countries, with most of the difference coming from the right tail of the weight distribution. 2) Part of the difference in obesity prevalence between the U.S. and Europe is explained by a higher fraction of food eaten away from home and notably lower time devoted to cooking in the U.S. 3) Sedentary lifestyle or a lack of vigorous and moderate physical activity may also explain a substantial share of the cross-country differences. 4) Differential SES patterns of energy intake and expenditure across countries cannot fully account for the observed cross-country variation in the SES gradient in obesity.
    Keywords: Body Mass Index, International Comparison, SHARE
    JEL: I12
    Date: 2007–05
  6. By: Beck, Günter W.; Wieland, Volker
    Abstract: The European Central Bank has assigned a special role to money in its two pillar strategy and has received much criticism for this decision. In this paper, we explore possible justifications. The case against including money in the central bank’s interest rate rule is based on a standard model of the monetary transmission process that underlies many contributions to research on monetary policy in the last two decades. Of course, if one allows for a direct effect of money on output or inflation as in the empirical “two-pillar” Phillips curves estimated in some recent contributions, it would be optimal to include a measure of (long-run) money growth in the rule. In this paper, we develop a justification for including money in the interest rate rule by allowing for imperfect knowledge regarding unobservables such as potential output and equilibrium interest rates. We formulate a novel characterization of ECB-style monetary cross-checking and show that it can generate substantial stabilization benefits in the event of persistent policy misperceptions regarding potential output. Such misperceptions cause a bias in policy setting. We find that cross-checking and changing interest rates in response to sustained deviations of long-run money growth helps the central bank to overcome this bias. Our argument in favor of ECB-style cross-checking does not require direct effects of money on output or inflation.
    Keywords: monetary policy, quantity theory, Phillips curve, European Central Bank, policy under uncertainty
    JEL: E32 E41 E43 E52 E58
    Date: 2007
  7. By: Woodford, Michael
    Abstract: Arguments for a prominent role for attention to the growth rate of monetary aggregates in the conduct of monetary policy are often based on references to low-frequency reduced-form relationships between money growth and inflation. The 'two-pillar Phillips curve' proposed by Gerlach (2004) has recently attracted a great deal of interest in the euro area, where it is sometimes supposed to provide empirical support for the wisdom of a 'two-pillar strategy' that uses distinct analytical frameworks to assess shorter-run and longer-run risks to price stability. I show, however, that regression coefficients of the kind reported by Assenmacher-Wesche and Gerlach (2006a) among others are quite consistent with a 'new Keynesian' model of inflation determination, in which the quantity of money plays no role in inflation determination, at either high or low frequencies. I also show that empirical results of this kind do not in themselves establish that money growth must be useful in forecasting inflation, either in the short run or over a longer run. Hence they provide little support for the ECB's monetary 'pillar'.
    Keywords: band-pass regression; ECB monetary policy strategy; monetarism
    JEL: E52 E58
    Date: 2007–09
  8. By: Cristina Hernández-Quevedo; Andrew M. Jones; Nigel Rice
    Abstract: This paper investigates the persistence in health limitations for individuals within the member states of the European Union. We use the full 8 waves of data available in the European Community Household Panel (ECHP) to explore the relative contributions of state dependence, unobserved heterogeneity and socioeconomic characteristics, in particular income, education and activity status, and how these vary across countries. We focus on binary measures of health limitations, constructed from the answers to the question: “Are you hampered in your daily activities by any physical or mental health problem, illness or disability?”. Dynamic non-linear panel data models are specified and estimated using both pooled and random effects probit and logit models together with complementary log-log models. The random effects probit specifications are preferred. Results reveal high state dependence of health limitations which remains after controlling for measures of socioeconomic status. There is heterogeneity in the socioeconomic gradient across countries.
    Keywords: health limitations, dynamic models, panel data
    JEL: I12 C23
    Date: 2007–03
  9. By: Bronwyn H. Hall; Grid Thoma; Salvatore Torrisi
    Abstract: This paper provides novel empirical evidence on the private value of patents and R&D in European firms during the period 1991-2004. We explore the relationship between firm's stock market value, patents, and "quality"-weighted patents issued by the European Patent Office (EPO) and the US Patent and Trademark Office (USPTO). We find that Tobin's q is positively and significantly associated with R&D and patent stocks, but that only those patents taken out in both patent offices or at the USPTO alone seem to be valued. Either forward citations or a composite quality indicator based on forward citations, family size and the number of technical fields covered by the patent are modestly informative for value. Software patents account for a rising share of total patents in the USPTO and EPO. Moreover, some scholars of innovation and intellectual property rights argue that software and business methods patents on average are of poor quality and that these patents are applied for merely to build portfolios rather than for protection of real inventions. We found that such patents are considerably more valuable than ordinary patents, especially if they are taken out in the U.S. However their quality indicators are no more valuable than those of other patents, suggesting that their primary purpose may be to increase the size of the patent portfolio.
    JEL: D24 G32 L86 O31 O34
    Date: 2007–09
  10. By: Silvester van Koten; Andreas Ortmann
    Abstract: Theory and empirics suggest that by curbing competition, incumbent electricity companies which used to be and here are referred to as Vertically Integrated Utilities (VIUs), can increase their profitability through combined ownership of generation and transmission and/or distribution networks. Because curbing competition is generally believed to be welfare-reducing, EU law requires unbundling (separation) of the VIU networks. However, the EU allows its member states the choice between incomplete (legal) and complete (ownership) unbundling. There is tantalizing anecdotal evidence that VIUs have tried to influence this choice through questionable means of persuasion. Such means of persuasion should be more readily available in countries with a more corrupted political culture. This paper shows that among the old EU member states (EU-15), countries which are perceived as more corrupt are indeed more likely to apply weaker forms of unbundling. Somewhat surprisingly, we do not obtain a similar finding for the new EU member states that acceded in 2004 (NMS-10). We provide a conjecture for this observation.
    Keywords: Electricity markets; regulation; vertical integration; corruption.
    JEL: K49 L43 L51 L94 L98
    Date: 2007–05
  11. By: Tullio Jappelli (Università di Napoli Federico II, CSEF and CEPR); Mario Padula (Università di Salerno and CSEf)
    Abstract: We review savings trends in Italy, summarizing available empirical evidence on Italians’ motives to save, relying on macroeconomic indicators as well as on data drawn from the Bank of Italy’s Survey of Household Income and Wealth from 1984 to 2004. The macroeconomic data indicate that households’ saving has dropped significantly, although Italy continues to rank above most other countries in terms of saving. We then examine with microeconomic data four indicators of household financial conditions: the propensity to save, the proportion of households with negative savings, the proportion of households with debt, and the proportion of households that lack access to formal credit markets. By international comparison, the level of debt of Italian households and default risk are relatively low. But in light of the deep changes undergone by the Italian pension system, the fall in saving is a concern, particularly for individuals who entered the labor market after the 1995 reform and who have experienced the largest decline in pension wealth.
    Date: 2007–09–01
  12. By: Fernandes, Ana M.
    Abstract: This paper examines the structure and performance of the services sector in Eastern European and Central Asian countries during 1997-2004. Services represent an increasing share of total value added and employment with the major sub-sectors being wholesale trade, retail trade, inland transport, telecommunications, and real estate activities. A clear divide separates EU-5 countries from South Eastern European countries and Ukraine in terms of services labor productivity. Although a large gap in productivity also separates EU-8 countries from EU-15 countries, that gap was reduced from 1997 to 2004 as most services sub-sectors experienced fast productivity growth. High skill intensive sub-sectors and information and communications technology producers and users have exhibited higher productivity levels and growth rates relative to other sub-sectors since 2000. The author finds a positive effect of services liberalization on the productivity growth of services sub-sectors. The author also finds a positive and significant effect of services liberalization in both finance and infrastructure on the productivity of downstream manufacturing.
    Keywords: Labor Policies,E-Business,Labor Markets,Economic Theory & Research,Transport Economics Policy & Planning
    Date: 2007–09–01
  13. By: Giuseppe Danese
    Abstract: This essay deals with two issues. First, it tries to delineate, via the concept of enlarged fiduciary proviso, the contribution of Corporate Social Responsibility (CSR) to the implementation of the EU Sustainability Strategy. The primary aim of the European institutions in delineating such strategy was to promote a concern for the environment, interpreted here as a proxy for the welfare of future generations of stakeholders. Progresses towards sustainable development can be made if we interpret CSR as a governance framework that extends fiduciary protection from a mono-stakeholder perspective, in which the sole relevant constituency for the design of corporate policy is the shareholders’, to a multi-stakeholder perspective, in which legitimate claims are held by a variety of constituencies, possibly operating at different times. Secondly, the essay tries to establish an organic link between the concept of sustainability and a Social Contract account of the business enterprise. The Social Contract of the stakeholders, an ideal reference point for corporate policy-makers, is formed behind a veil of ignorance, resulting in an agreement that is both impartial and nonhistorical.
    Keywords: Corporate Social responsibility (CSR), Sustainability Strategy, Fiduciary Duties.
    JEL: M14 O16 Q01
    Date: 2007
  14. By: Giannetti, Mariassunta; Laeven, Luc
    Abstract: Sweden offers a unique natural experiment to analyze the microeconomic effects of institutionalized saving on ownership structure, corporate governance and performance of listed companies. First, the Swedish pension reform increased the participation of pension funds in the domestic stock market and caused a significant reshuffling in the ownership of the existing pension funds. Second, the availability of detailed data on firm ownership allows us to document the effects of the pension reform. We show that the effects of institutional investment on firm performance depend on the industry structure of pension funds. In particular, we find that firm performance improves if large independent private pension funds and public pension funds increase their equity stakes in the firm, but not if smaller pension funds and pension funds related to financial institutions and industrial groups increase their shareholdings. Additionally, controlling shareholders appear reluctant to relinquish control and the control premium increases if public pension funds acquire shares.
    Keywords: Control premium; Controlling shareholders; Dual class shares; Pension funds
    JEL: G23 G3
    Date: 2007–09
  15. By: Mitchell, James; Weale, Martin R.
    Abstract: This paper assesses the accuracy of individuals’ expectations of their financial circumstances, as reported in the British Household Panel Survey, as predictors of outcomes and identifies what factors influence their reliability. As the data are qualitative bivariate ordered probit models, appropriately identified, are estimated to draw out the differential effect of information on expectations and realisations. Rationality is then tested and we seek to explain deviations of realisations from expectations at a micro-economic level, possibly with reference to macroeconomic shocks. A bivariate regime-switching ordered probit model, distinguishing between states of rationality and irrationality, is then estimated to identify whether individual characteristics affect the probability of an individual using some alternative model to rationality to form their expectations.
    Keywords: household behaviour, expectation formation
    JEL: D19 D84
    Date: 2007
  16. By: Sergey Slobodyan; Viatcheslav Vinogradov
    Abstract: In their recent paper, Boldrin and Montes (2005) analyze the “return on human capital investment” theory and show that if borrowing for education is not possible, then a combined public education and pension system that uses lump sum taxes and transfers can replicate the first-best decentralized allocation achieved in an economy without taxes where borrowing for human capital accumulation (education) is allowed. Taking into account that such borrowing is either absent or inefficient in many countries, a combined public education/public pensions scheme in such countries might prove to be welfare enhancing. Guided by this theoretical framework, we calibrate the parameters of an interconnected pension and education system for the Czech Republic under different demographic scenarios and fiscal rules. We also model the impact of an increase in the retirement age and of a hypothetical imbalance of pensions or educational transfers.
    Keywords: Public education, demographic development, pay-as-you-go pensions
    JEL: H52 H55 I22 I28 J11 J26
    Date: 2007–04
  17. By: Michela Cella (University of Milan-Bicocca); Massimo Florio (University of Milan)
    Abstract: This paper presents a simple principal-supervisor-agent model of the investment game between a supranational player (the principal), such as the European Commission, a regional government (the supervisor), and a private firm (the executing agency) . The EC is a benevolent social welfare maximiser, the regional government has an objective function that combines private benefits to politicians and the welfare of their constituency, the agent is a utility maximiser. The latter can be of a high or low efficiency type, and the operative cost, observable ex post, depends upon this binary technology and managerial effort, also unobservable. The EC offers a matching capital grant to the firm (as it does with the EU Structural Funds), intended to cover part of the investment cost of an otherwise unprofitable project. The regional government offers the remaining share of the subsidy. If the firm claims to be inefficient, the EC can send with some probability an ex-post evaluator and there is a penalty if she discovers that it is of the efficient-type. Moreover the regional government can collaborate with the EC to disclose additional information it may have on the firm, but it needs to be given a reward not to collude with the firm, that is in turn willing to offer a private benefit to the regional government to conceal unfavourable evidence. We show that the role of these providers of additional information is essential to reducing the value of the grant and in improving the inefficiencies caused by asymmetric information and the grant decision stage. The paper suggests that the EC should include ex-post evaluation, currently provided by the Structural Funds regulations, within regional planning contracts for infrastructure investment; and that regional governments should be offered a reward for disclosing additional information on the firm technology (ex-ante supervision).
    Keywords: Hierachical contracting, evaluation, EU Structural Funds,
    Date: 2007–07–16
  18. By: Ramb, Fred
    Abstract: This study is the first empirical analysis to investigate the relationship between the investment behaviour of firms resident in Germany and the empirically determined marginal tax rates developed by John R. Graham. It is based on the Bundesbank's corporate balance sheet statistics for the period 1971-2002. In an autoregressive distributed lag model, the marginal tax rate is shown to be significant, with an elasticity of between 0.1 and 0.2. An error correction model does not produce any plausible results for the marginal tax rate. Graham's marginal tax rates are a complement to the methods typically used to determine the effective marginal tax rates and effective average tax rates.
    Keywords: Corporate marginal tax rate, tax loss carryforward, investment behaviour
    JEL: D21 H25
    Date: 2007
  19. By: Bill Allen; Esther Baroudy; Richard Batley; Bruno Paulson; Peter Sinclair
    Abstract: Despite its varying pattern of cyclical ups and downs, the British economy has, on average,grown at 2.5% per year for six decades, with minimal breaks in trend. So history warns us that government policies to change that trend may have little effect. There is a bit more movement in the trend growth of national income per head, which has been weakening worryingly in recent years. On unchanged policies, we think it likelier than not that aggregate national income will grow more slowly than in the past; and this is even likelier for national income per head. Silly policies to stimulate growth (such as boosting demand) have no long run benefit, only the costs of higher inflation and uncertainty. Sound, supply-based policies offer real promise – but they tend to work only slowly. One recent boost to overall growth (but not growth of GDP per head) comes from three sources on the labour side: increased immigration, the future course of which is uncertain; a second from welfare to work, where further continuing big gains are improbable; and rising labour force participation by the old, which will continue to be useful but modest. To keep raising the quality (or productivity) of labour, improving secondary education, mathematical skills and technical training are all important. So, too, are saving and investment. Raising the growth of Britain’s capital stock will be a slow process. It is cuts in Corporation Tax that offer the best prospects here: simply broadening the base could buy a big cut in the standard rate, to about 15%, with deeper cuts possible if accompanied by some tweaking of VAT and higher “green” taxes. The switch to higher saving and investment could then be reinforced by some reductions in inheritance tax, and some flattening in income tax rates. Further growthsupporting measures we consider include various ways of improving the supply of housing; steps to reduce banks’ lending rates to small and medium sized firms, which appear unjustifiably large; and a switch to congestion-sensitive road pricing – a clear case of “adopting market principles” to cure an artificial shortage – coupled with higher investment in infrastructure. We conclude by contrasting the economic growth records of Ireland and Scotland, among other regions or countries. Recent years have seen Ireland outperform Scotland by a large margin – and similar “peripheral” regions in France, Germany and Italy even more. One lesson this teaches is that much can be achieved, sooner or later, by taxing company profits more lightly. The ultimate beneficiaries of lower taxes on profits are consumers and workers. The key message is to think long term. Sustainable long term growth is a tripod. One leg calls for building up Britain’s physical capital; a second, deepening its human capital by enhancing numeracy and training; a third, defending its environmental capital. These are not alternatives. They are complementary imperatiClassification-JEL: 040
    Keywords: Economic Growth
    Date: 2007–08
  20. By: Daniela Vandone (University of Milan)
    Abstract: The analysis sets out to clarify whether households' demand for consumer credit can be adequately explained by models presented in the literature (life-cycle and permanent income) or whether other factors are observable, such as the use of debt to alleviate financial difficulties. With this in mind, the research seeks to establish whether specific determinants characterise the consumer credit market in different areas of the country. The Bank of Italy Survey on Household Income and Wealth for 2004 (SHIW) is used to identify determinants of consumer credit and the possible existence of territorial specificity.
    Keywords: consumer credit, household debt sustainability, Survey on Household Income and Wealth, territorial specificity,
    Date: 2007–09–14
  21. By: Zezza, Alberto; Davis, Benjamin; Carletto, Gero; Kilic, Talip
    Abstract: In view of its increasing importance, and the dearth of information on return migration and its impacts on source households, this study uses data from the 2005 Albania Living Standards Measurement Study survey and assesses the impact of past migration experience of Albanian households on non-farm business ownership through instrumental variables regression techniques. Moreover, consideri ng the differences in earning potentials and opportunities for skill acquisition in different destination countries, the impact of household past migration experience is differentiated by main migrant destinations, namely Greece and Italy. The study also tests for the hypothesis of the existence of migration cycles, by differentiating the time spent abroad based on the year of return. The empirical results indicate that household past migration experience exerts a positive impact on the probability of owning a non-farm business. While one additional year in Greece increases the probability of household business ownership by roughly 7 percent, a similar experience in Italy or further destinations raises the probability by over 30 percent. Although past migration experience for the period 1990-2000 is positively associated with the likelihood of owning a household enterprise, a similar impact does not materialize for the period 2001-2004. The latter finding seems suggestive of the fact that more recent migrants are yet to attain a target level of required savings and skills in order to successfully establish a new business upon return.
    Keywords: Population Policies,Access to Finance,Debt Markets,,Voluntary and Involuntary Resettlement
    Date: 2007–09–01
  22. By: Anthony Garratt (School of Economics, Mathematics & Statistics, Birkbeck); Gary Koop; Emi Mise; Shaun P Vahey
    Abstract: A popular account for the demise of the UK monetary targeting regime in the 1980s blames the weak predictive relationships between broad money and inflation and real output. In this paper, we investigate these relationships using a variety of monetary aggregates which were used as intermediate UK policy targets. We use both real-time and final vintage data and consider a large set of recursively estimated Vector Autoregressive (VAR) and Vector Error Correction models (VECM). These models differ in terms of lag length and the number of cointegrating relationships. Faced with this model uncertainty, we utilize Bayesian model averaging (BMA) and contrast it with a strategy of selecting a single best model. Using the real-time data available to UK policymakers at the time, we demonstrate that the in-sample predictive content of broad money fluctuates throughout the 1980s for both strategies. However, the strategy of choosing a single best model amplifies these fluctuations. Out-of-sample predictive evaluations rarely suggest that money matters for either inflation or real output, regardless of whether we select a single model or do BMA. Overall, we conclude that the money was a weak (and unreliable) predictor for these key macroeconomic variables. But the view that the predictive content of UK broad money diminished during the 1980s receives little support using either the real-time or final vintage data.
    Keywords: Money, Vector Error Correction Models, Model Uncertainty, Bayesian Model Averaging, Real Time Data
    JEL: C11 C32 C53 E51 E52
    Date: 2007–09

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