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Money in the Inflation Equation: the Euro Area Evidence

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Abstract

The ECB is the only major central bank that still emphasizes the role of money in monetary policy management. In this paper, we bring some support to this approach. Taking into account Euro area data from the period between 1999 and 2007, we demonstrate that a steady 10 per cent increase in M3 may result in an inflation rate of approximately 2½ percentage points. A negative output gap would have a short term offsetting effect, and vice versa.

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  • Fourçans, André & Vranceanu, Radu, 2008. "Money in the Inflation Equation: the Euro Area Evidence," ESSEC Working Papers DR 08012, ESSEC Research Center, ESSEC Business School.
    • Handle: RePEc:ebg:essewp:dr-08012
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    1. Katrin Assenmacher-Wesche & Stefan Gerlach, 2007. "Understanding the Link between Money Growth and Inflation in the Euro Area," Palgrave Macmillan Books, in: David Cobham (ed.), The Travails of the Eurozone, chapter 2, pages 10-41, Palgrave Macmillan.
    2. Helge Berger & Pär Österholm, 2011. "Does Money Growth Granger Cause Inflation in the Euro Area? Evidence from Out‐of‐Sample Forecasts Using Bayesian VARs," The Economic Record, The Economic Society of Australia, vol. 87(276), pages 45-60, March.
    3. Edward Nelson, 2008. "Why Money Growth Determines Inflation in the Long Run: Answering the Woodford Critique," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1791-1814, December.
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    6. Gerlach, Stefan, 2003. "The ECB's Two Pillars," CEPR Discussion Papers 3689, C.E.P.R. Discussion Papers.
    7. Hofmann, Boris, 2009. "Do monetary indicators lead euro area inflation?," Journal of International Money and Finance, Elsevier, vol. 28(7), pages 1165-1181, November.
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    11. Fourcans, Andre & Vranceanu, Radu, 2004. "The ECB interest rate rule under the Duisenberg presidency," European Journal of Political Economy, Elsevier, vol. 20(3), pages 579-595, September.
    12. Helge Berger & Pär Österholm, 2011. "Does Money Growth Granger Cause Inflation in the Euro Area? Evidence from Out‐of‐Sample Forecasts Using Bayesian VARs," The Economic Record, The Economic Society of Australia, vol. 87(276), pages 45-60, March.
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    16. Fourcans, Andre & Vranceanu, Radu, 2007. "The ECB monetary policy: Choices and challenges," Journal of Policy Modeling, Elsevier, vol. 29(2), pages 181-194.
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    Cited by:

    1. Horváth, Roman & Komárek, Luboš & Rozsypal, Filip, 2011. "Does money help predict inflation? An empirical assessment for Central Europe," Economic Systems, Elsevier, vol. 35(4), pages 523-536.

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    More about this item

    Keywords

    ECB; Inflation; Monetary Policy; Money;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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