Working Paper: CEPR ID: DP5868
Authors: Katrin Assenmacher-Wesche; Stefan Gerlach
Abstract: Many central banks have abandoned monetary targeting because the link between money growth and inflation seemed to disappear in the 1980s. Using spectral regression techniques, we show that for the euro area, Japan, the UK and the US there is a unit relationship between money growth and inflation at low frequencies when the impact of interest rate changes on money demand is accounted for. We estimate Phillips-curve equations in which the low-frequency information from money growth is combined with high-frequency information from the output gap to explain movements in inflation.
Keywords: frequency domain; Phillips curve; quantity theory; spectral regression
JEL Codes: C22; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low-frequency money growth (E49) | inflation (E31) |
| output gap (E23) | inflation (E31) |
| money growth (O42) | inflation (E31) |
| money growth (O42) | inflation (low frequencies) (E31) |