Understanding the Link between Money Growth and Inflation in the Euro Area

51 Pages Posted: 2 Aug 2006

See all articles by Katrin Assenmacher

Katrin Assenmacher

Swiss National Bank

Stefan Gerlach

Central Bank of Ireland; Centre for Economic Policy Research (CEPR)

Date Written: May 2006

Abstract

Announced in the autumn of 1998, the monetary policy strategy of the European Central Bank (ECB) quickly became controversial, arguably because the ECB provided neither an explicit representation of the inflation process nor an explanation for why it necessitated the adoption of a two-pillar framework. Several reduced-form empirical models that seek to do so have subsequently been presented in the literature. The hallmark of these models is the hypothesis that inflation can be decomposed into a "trend," which is explained by a smoothed measure of past money growth, and a deviation from that trend, which is accounted for by the output gap. In this paper we survey this literature, discuss how it relates to the monetary transmission mechanism and extend the inflation equations by introducing cost-push shocks. We find that changes in import prices, oil prices and exchange rates are statistically significant in euro-area inflation equations but that they leave intact the earlier findings that money growth and the output gap matter.

Keywords: Spatial regression, frequency domain, Philipps curve, quantity theory

JEL Classification: C22, E3, E5

Suggested Citation

Assenmacher, Katrin and Gerlach, Stefan, Understanding the Link between Money Growth and Inflation in the Euro Area (May 2006). CEPR Discussion Paper No. 5683. Available at SSRN: https://ssrn.com/abstract=921834

Katrin Assenmacher

Swiss National Bank ( email )

Borsenstrasse 15
CH-8022 Zurich
Switzerland

Stefan Gerlach (Contact Author)

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
31
Abstract Views
945
PlumX Metrics