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Forecasting Inflation (and the Business Cycle?) with Monetary Aggregates
C51 - Model Construction and Estimation
E31 - Price Level; Inflation; Deflation
E32 - Business Fluctuations; Cycles
E52 - Monetary Policy (Targets, Instruments, and Effects)
E58 - Central Banks and Their Policies
We show how monetary aggregates can be usefully incorporated in forecasts of inflation. This requires fully disregarding the high frequency fluctuations blurring the money/inflation relation, i.e., the projection of inflation onto monetary aggregates must be restricted to the low frequencies. Using the same tools, we show that money growth has (little) predictive power over output at business cycle frequencies.