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The ECB's Two Pillars

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  • Gerlach, Stefan

Abstract

This Paper suggests a formal interpretation of the ECB’s two-pillar framework for monetary policy. I decompose inflation in the euro area into high- and low-frequency (or short-run and medium/long-run) components, which are correlated with monetary growth and the output gap, respectively. I proceed to propose and estimate a ‘two-pillar’ Phillips curve that assumes that money causes prices. While the model fits well and the causality assumption seems compatible with the 1980-90 data, there appears to be reverse causality from prices to money in the 1991-2001 period, which would invalidate my model.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3689.

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Date of creation: Jan 2003
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Handle: RePEc:cpr:ceprdp:3689

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  1. Nicoletti-Altimari, Sergio, 2001. "Does money lead inflation in the euro area?," Working Paper Series, European Central Bank 0063, European Central Bank.
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  3. Lars E.O. Svensson & Stefan Gerlach, 2001. "Money and inflation in the Euro Area: A case for monetary indicators?," BIS Working Papers 98, Bank for International Settlements.
  4. G. Coenen & J.-L. Vega, 2001. "The demand for M3 in the euro area," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 16(6), pages 727-748.
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  10. Bennett T. McCallum, 1983. "On Low-Frequency Estimates of "Long-Run" Relationships in Macro- economics," NBER Working Papers 1162, National Bureau of Economic Research, Inc.
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  14. Stefan Gerlach, 1995. "Testing the quantity theory using long-run averaged cross-country data," BIS Working Papers 31, Bank for International Settlements.
  15. Paul De Grauwe & Magdalena Polan, 2001. "Is Inflation Always and Everywhere a Monetary Phenomenon?," International Economics Working Papers Series, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics wpie009, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
  16. Claus Brand & Dieter Gerdesmeier & Barbara Roffia, 2002. "Estimating the trend of M3 income velocity underlying the reference value for monetary growth," Occasional Paper Series 03, European Central Bank.
  17. Issing,Otmar & Gaspar,Vitor & Angeloni,Ignazio & Tristani,Oreste, 2001. "Monetary Policy in the Euro Area," Cambridge Books, Cambridge University Press, number 9780521788885, 9.
  18. Buiter, Willem H, 1984. "Granger-Causality and Policy Effectiveness," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 51(202), pages 151-62, May.
  19. De Grauwe, Paul & Polan, Magdalena, 2001. "Is Inflation Always and Everywhere a Monetary Phenomenon?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2841, C.E.P.R. Discussion Papers.
  20. Brand, Claus & Cassola, Nuno, 2000. "A money demand system for euro area M3," Working Paper Series, European Central Bank 0039, European Central Bank.
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