Working Paper: CEPR ID: DP5723
Authors: Katrin Assenmacher-Wesche; Stefan Gerlach
Abstract: While monetary targeting has become increasingly rare, many central banks attach weight to money growth in setting interest rates. This raises the issue of how money can be combined with other variables, in particular the output gap, when analysing inflation. The Swiss National Bank emphasises that the indicators it uses to do so vary across forecasting horizons. While real indicators are employed for short-run forecasts, money growth is more important at longer horizons. Using band spectral regressions and causality tests in the frequency domain, we show that this interpretation of the inflation process fits the data well.
Keywords: frequency domain; Phillips curve; 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 |
|---|---|
| money growth (O42) | inflation (E31) |
| output gap (E23) | inflation (E31) |