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Inflation and core money growth in the euro area

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  • Neumann, Manfred J. M.
  • Greiber, Claus
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    Abstract

    This paper studies the importance of money for inflation in the euro area. An inflation equation is derived from a small model that combines the supply and demand for money with a Phillips curve and the assumption that inflation expectations develop adaptively. The model's solution attributes an impact on inflation not to actual money growth but to its core component. The core component is defined as the long-lasting, low-frequency component of nominal money growth in excess of real money demand. Using quarterly euro area data from the 1980-2004 period we apply different filters (Hodrick-Prescott, Baxter-King, wavelets) as empirical measures of core money. The estimation results uniformly indicate that inflation and core money growth are closely linked, exhibiting a one-to-one relationship in the long-run. Higher-frequency money growth, in contrast, contributes nil to the explanation of actual inflation. As a stylised fact regarding frequency domain properties, cycles of money growth below eight years are found to be insignificant for inflation. --

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    Bibliographic Info

    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2004,36.

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    Date of creation: 2004
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    Handle: RePEc:zbw:bubdp1:2302

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    Related research

    Keywords: ECB; inflation; quantity theory; frequency analysis; Hodrick-Prescott filter; band pass filter; wavelets;

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    1. Hamerle, Alfred & Liebig, Thilo & Scheule, Harald, 2004. "Forecasting Credit Portfolio Risk," Discussion Paper Series 2: Banking and Financial Studies 2004,01, Deutsche Bundesbank, Research Centre.
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