Summary of WP/92/56
“Using an EC-Wide Monetary Aggregate in Stage Two of EMU” by Tamim A. Bayoumi and Peter B. Kenen
The agreement on economic and monetary union (EMU) adopted at the Maastricht summit in December 1991 calls upon the central banks of the European Community (EC) to coordinate their monetary policies more closely. The agreement, however, says nothing about the way in which this policy coordination should be carried out, apart from stressing the importance of maintaining stable exchange rates within the exchange rate mechanism (ERM) of the European Monetary System.
This paper assesses how useful the aggregate ERM money supply might be as an intermediate monetary target in stage two of EMU. First, Granger causality tests are used to investigate the degree to which both the domestic and the ERM-wide money supply are useful in predicting real growth and inflation in the different countries within the ERM. The ERM-wide money supply is found to be a generally useful predictor of future inflation--indeed, a better predictor than the national money supply in several cases. In particular, it is significant for the three largest economies in the ERM, namely, Germany, France, and Italy. Next, the paper examines the ERM money supply to determine whether it is a useful predictor of trends in the price level. Here, again, the ERM money supply appears to be an important influence on the price level trends of member countries.
The results reported in this paper are not decisive and more work should be carried out. However, they do suggest that it may be useful to use an EC-wide monetary aggregate when coordinating national money supplies in stage two of EMU. An EC-wide monetary aggregate promises to provide more information than national monetary aggregates about the impact of monetary policies on national inflation rates.