Working Paper: CEPR ID: DP3689
Authors: Stefan Gerlach
Abstract: This Paper suggests a formal interpretation of the ECB?s two-pillar framework for monetary policy. I decompose inflation in the euro areainto high- and low-frequency (or short-run and medium/long-run) components, which are correlated with monetary growth and the output gap, respectively. I proceed to propose and estimate a ?two-pillar? Phillips curve that assumes that money causes prices. While the model fits well and the causality assumption seems compatible with the 1980-90 data, there appears to be reverse causality from prices to money in the 1991-2001 period, which would invalidate my model.
Keywords: monetary policy; filtering; ECB
JEL Codes: E31; E42; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| money growth (O42) | inflation (E31) |
| inflation (E31) | money growth (O42) |