Money Growth and Consumer Price Inflation in the Euro Area: A Wavelet Analysis

37 Pages Posted: 21 Jun 2016

See all articles by Martin Mandler

Martin Mandler

Deutsche Bundesbank - Economics Department; University of Giessen - Department of Economics

Michael Scharnagl

Deutsche Bundesbank

Date Written: 2014

Abstract

Our paper studies the relationship between money growth and consumer price inflation in the euro area using wavelet analysis. Wavelet analysis allows to account for variations in the money growth-inflation relationship both across the frequency spectrum and across time. We find evidence of strong comovements between money growth and inflation at low frequencies with money growth as the leading variable. However, our analysis of time variation at medium-to-long-run frequencies indicates a weakening of the relationship after the mid 1990s which also reflects in a deterioration of the leading indicator property and a decline in the cross wavelet gain. In contrast, most of the literature, by failing to account for the effects of time variation, estimated stable long-run relationships between money growth and inflation well into the 2000s.

Keywords: money growth, inflation, wavelet analysis

JEL Classification: C30, E31, E40

Suggested Citation

Mandler, Martin and Scharnagl, Michael, Money Growth and Consumer Price Inflation in the Euro Area: A Wavelet Analysis (2014). Bundesbank Discussion Paper No. 33/2014, Available at SSRN: https://ssrn.com/abstract=2797012

Martin Mandler (Contact Author)

Deutsche Bundesbank - Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

University of Giessen - Department of Economics ( email )

Licher Str. 62
Giessen, Hessen D-35394
Germany

Michael Scharnagl

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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