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Does Money Granger Cause Inflation in the Euro Area?

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  • Carlos Robalo Marques
  • Joaquim Pina

Abstract

In this paper we re-evaluate the empirical evidence on money-inflation Granger causality for the euro area and, in contrast to Trecroci and Vega (2000), conclude that money does in fact Granger cause inflation. We also show that it takes about a year and a half for changes in money growth to start passing on to inflation and five years for the whole adjustment to take place
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Suggested Citation

  • Carlos Robalo Marques & Joaquim Pina, 2003. "Does Money Granger Cause Inflation in the Euro Area?," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:bdpart:b200307
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    References listed on IDEAS

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    1. Toda, Hiro Y & Phillips, Peter C B, 1993. "Vector Autoregressions and Causality," Econometrica, Econometric Society, vol. 61(6), pages 1367-1393, November.
    2. Yamada, Hiroshi & Toda, Hiro Y., 1998. "Inference in possibly integrated vector autoregressive models: some finite sample evidence," Journal of Econometrics, Elsevier, pages 55-95.
    3. G. Coenen & J.-L. Vega, 2001. "The demand for M3 in the euro area," Journal of Applied Econometrics, John Wiley & Sons, Ltd., pages 727-748.
    4. Anderton, R. & Skudelny, F., 2001. "Exchange Rate Volatility and Euro Area Imports," Papers 64, Quebec a Montreal - Recherche en gestion.
    5. Phillips, Peter C B, 1995. "Fully Modified Least Squares and Vector Autoregression," Econometrica, Econometric Society, pages 1023-1078.
    6. Gerlach, Stefan & Svensson, Lars E. O., 2003. "Money and inflation in the euro area: A case for monetary indicators?," Journal of Monetary Economics, Elsevier, pages 1649-1672.
    7. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, pages 293-335.
    8. Johansen, Soren, 1992. "Testing weak exogeneity and the order of cointegration in UK money demand data," Journal of Policy Modeling, Elsevier, pages 313-334.
    9. James H. Stock & Mark W. Watson, 1998. "Diffusion Indexes," NBER Working Papers 6702, National Bureau of Economic Research, Inc.
    10. Friedman, Milton, 1972. "Have Monetary Policies Failed?," American Economic Review, American Economic Association, pages 11-18.
    11. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, pages 293-335.
    12. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, pages 225-250.
    13. Brand, Claus & Cassola, Nuno, 2000. "A money demand system for euro area M3," Working Paper Series 0039, European Central Bank.
    14. Olli Castren & Tuomas Takalo, 2000. "Capital Market Development, Corporate Governance and the Credibility of Exchange Rate Pegs," Econometric Society World Congress 2000 Contributed Papers 0515, Econometric Society.
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    Cited by:

    1. Hall, Stephen G. & Hondroyiannis, George & Swamy, P.A.V.B. & Tavlas, George S., 2009. "Assessing the causal relationship between euro-area money and prices in a time-varying environment," Economic Modelling, Elsevier, vol. 26(4), pages 760-766, July.

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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