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DOES MONEY MATTER FOR INFLATION IN THE EURO AREA?
Author(s) -
KAUFMANN SYLVIA,
KUGLER PETER
Publication year - 2008
Publication title -
contemporary economic policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.454
H-Index - 49
eISSN - 1465-7287
pISSN - 1074-3529
DOI - 10.1111/j.1465-7287.2008.00113.x
Subject(s) - economics , inflation (cosmology) , cointegration , real interest rate , monetary economics , interest rate , monetary policy , yield (engineering) , output gap , variance (accounting) , macroeconomics , econometrics , physics , materials science , accounting , theoretical physics , metallurgy
We analyze the relationship between M3 growth and inflation within an error correction framework including also the output gap, the 3‐mo EURIBOR, and the 10‐yr government bond yield. We find robust cointegration between money growth and inflation. Shocks in M3 growth account for up to 30% of the inflation forecast error variance, while the effects of output gap and interest rate shocks are mainly transitory. Significantly different dynamics are found during periods at the end of the seventies and beginning of the eighties when interest rate and inflation rate levels were high and real money growth decreasing. ( JEL C32, E31, E41)