Working Paper: CEPR ID: DP5632
Authors: Katrin Assenmacher-Wesche; Stefan Gerlach
Abstract: Several authors have recently interpreted the ECB's two-pillar framework as separate approaches to forecast and analyse inflation at different time horizons or frequency bands. The ECB has publicly supported this understanding of the framework. This paper presents further evidence on the behaviour of euro area inflation using band spectrum regressions, which allow for a natural definition of the short and long run in terms of specific frequency bands, and causality tests in the frequency domain. The main finding is that variations in inflation are well explained by low-frequency movements of money and real income growth and high-frequency fluctuations of the output gap.
Keywords: Frequency Domain; Inflation; Money Growth; Quantity Theory; Spectral Regression
JEL Codes: C22; E3; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high-frequency fluctuations in output gap (E32) | variations in inflation (E31) |
| output gap (E23) | inflation (E31) |
| low-frequency movements in money growth (E49) | variations in inflation (E31) |
| low-frequency movements in money growth (E49) | average inflation rate (E31) |