Understanding the Link between Money Growth and Inflation in the Euro Area

Katrin Assenmacher and Stefan Gerlach

Chapter 2 in The Travails of the Eurozone, 2007, pp 10-41 from Palgrave Macmillan

Abstract: Abstract In preparation for the establishment of European Monetary Union in January 1999, the European Central Bank (ECB) decided to adopt a monetary policy strategy consisting of two main elements or ‘pillars’. The first of these was ‘a prominent role for money with a reference value for the growth of a monetary aggregate’ subsequently defined to be 4.5 per cent annual growth of M3, and the second ‘a broadly-based assessment of the outlook for future price developments’.1 From the outset this two-pillar framework was controversial. One explanation for this might have been that the ECB provided neither an explicit representation of the inflation process nor a motivation for why it necessitated a two-pillar framework. Whatever the reasons, many observers misinterpreted the two pillars as combining monetary and inflation targeting, and criticised the framework for being inconsistent and lacking clarity.

Keywords: Euro Area; European Central Bank; Money Demand; Import Price; Phillips Curve (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1057/9780230801479_2

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