Core ERM money demand and effects on inflation

The paper presents evidence supporting the existence of a stable money demand relationship for Germany plus st core group of countries-France, Belgium, Denmark, Luxembourg and the Netherlands-that have not realigned their parities against the deutschmark since at least 1987. The predictive power of the core ERM aggregate for French and German inflation is also examined; it is shown that the ERM aggregate is a better predictor of German inflation than the German monetary aggregate alone. Thus, the ERM money supply is a useful indicator for German monetary policy, even if the latter only focuses on achieving domestic inflation targets.