Inflation and core money growth in the euro area

Manfred J. M. Neumann and Claus Greiber

No 2004,36, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

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.

Keywords: ECB; inflation; quantity theory; frequency analysis; Hodrick-Prescott filter; band pass filter; wavelets (search for similar items in EconPapers)
JEL-codes: E31 E42 E52 E58 (search for similar items in EconPapers)
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (73)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/19503/1/200436dkp.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp1:2302

Access Statistics for this paper

More papers in Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().