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Money growth and consumer price inflation in the euro area: A wavelet analysis

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  • Mandler, Martin
  • Scharnagl, Michael

Abstract

Our paper studies the relationship between money growth and consumer price inflation in the euro area using wavelet analysis. Wavelet analysis allows to account for variations in the money growth-inflation relationship both across the frequency spectrum and across time. We find evidence of strong comovements between money growth and inflation at low frequencies with money growth as the leading variable. However, our analysis of time variation at medium-to-long-run frequencies indicates a weakening of the relationship after the mid 1990s which also reflects in a deterioration of the leading indicator property and a decline in the cross wavelet gain. In contrast, most of the literature, by failing to account for the effects of time variation, estimated stable long-run relationships between money growth and inflation well into the 2000s.

Suggested Citation

  • Mandler, Martin & Scharnagl, Michael, 2014. "Money growth and consumer price inflation in the euro area: A wavelet analysis," Discussion Papers 33/2014, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:332014
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    References listed on IDEAS

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    1. Ramsey, J.B., 2002. "Wavelets in Economics and Finance: Past and Future," Working Papers 02-02, C.V. Starr Center for Applied Economics, New York University.
    2. Crowley, Patrick M., 2005. "An intuitive guide to wavelets for economists," Research Discussion Papers 1/2005, Bank of Finland.
    3. Pedro Teles & Harald Uhlig & João Valle e Azevedo, 2016. "Is Quantity Theory Still Alive?," Economic Journal, Royal Economic Society, vol. 126(591), pages 442-464, March.
    4. Dewald, William G. & Haug, Alfred A., 2004. "Longer-term effects of monetary growth on real and nominal variables, major industrial countries, 1880-2001," Working Paper Series 382, European Central Bank.
    5. Ramsey James B., 2002. "Wavelets in Economics and Finance: Past and Future," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 6(3), pages 1-29, November.
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    Cited by:

    1. Aguiar-Conraria, Luis & Martins, Manuel M.F. & Soares, Maria Joana, 2018. "Estimating the Taylor rule in the time-frequency domain," Journal of Macroeconomics, Elsevier, vol. 57(C), pages 122-137.
    2. Luís Aguiar-Conraria & Maria Joana Soares & Rita Sousa, 2017. "California´s Carbon Market and Energy Prices: A Wavelet Analysis," NIPE Working Papers 13/2017, NIPE - Universidade do Minho.
    3. Scharnagl, Michael & Mandler, Martin, 2015. "The relationship of simple sum and Divisia monetary aggregates with real GDP and inflation: a wavelet analysis for the US," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112879, Verein für Socialpolitik / German Economic Association.
    4. Luís Aguiar-Conraria & Manuel M. F. Martins & Maria Joana Soares, 2019. "The Phillips Curve at 60: time for time and frequency," NIPE Working Papers 04/2019, NIPE - Universidade do Minho.
    5. Flor, Michael A. & Klarl, Torben, 2017. "On the cyclicity of regional house prices: New evidence for U.S. metropolitan statistical areas," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 134-156.
    6. Jung, Alexander, 2016. "Have monetary data releases helped markets to predict the interest rate decisions of the European Central Bank?," Working Paper Series 1926, European Central Bank.
    7. Gallegati, Marco & Giri, Federico & Fratianni, Michele, 2019. "Money growth and inflation : International historical evidence on high inflation episodes for developed countries," Research Discussion Papers 1/2019, Bank of Finland.
    8. repec:eee:finlet:v:26:y:2018:i:c:p:204-214 is not listed on IDEAS
    9. Marcin Koltuniak, 2016. "Examination of the directions of spillover effects between the real estate and stock prices in Poland using wavelet analysis," Bank i Kredyt, Narodowy Bank Polski, vol. 47(3), pages 251-266.
    10. Rünstler, Gerhard & Balfoussia, Hiona & Burlon, Lorenzo & Buss, Ginters & Comunale, Mariarosaria & De Backer, Bruno & Dewachter, Hans & Guarda, Paolo & Haavio, Markus & Hindrayanto, Irma & Iskrev, Nik, 2018. "Real and financial cycles in EU countries - Stylised facts and modelling implications," Occasional Paper Series 205, European Central Bank.

    More about this item

    Keywords

    money growth; inflation; wavelet analysis;

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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