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Inflation and core money growth in the euro area

Author

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

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.

Suggested Citation

  • Neumann, Manfred J. M. & Greiber, Claus, 2004. "Inflation and core money growth in the euro area," Discussion Paper Series 1: Economic Studies 2004,36, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp1:2302
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    File URL: https://www.econstor.eu/bitstream/10419/19503/1/200436dkp.pdf
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    References listed on IDEAS

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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.
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    More about this item

    Keywords

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

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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