Discussion Paper Details
Please find the details for DP6447 in an easy to copy and paste format below:
Title: Does a 'Two-Pillar Phillips Curve' Justify a Two-Pillar Monetary Policy Strategy?
Author(s): Michael Woodford
Publication Date: September 2007
Keyword(s): band-pass regression, ECB monetary policy strategy and monetarism
Programme Area(s): International Macroeconomics
Abstract: Arguments for a prominent role for attention to the growth rate of monetary aggregates in the conduct of monetary policy are often based on references to low-frequency reduced-form relationships between money growth and inflation. The 'two-pillar Phillips curve' proposed by Gerlach (2004) has recently attracted a great deal of interest in the euro area, where it is sometimes supposed to provide empirical support for the wisdom of a 'two-pillar strategy' that uses distinct analytical frameworks to assess shorter-run and longer-run risks to price stability. I show, however, that regression coefficients of the kind reported by Assenmacher-Wesche and Gerlach (2006a) among others are quite consistent with a 'new Keynesian' model of inflation determination, in which the quantity of money plays no role in inflation determination, at either high or low frequencies. I also show that empirical results of this kind do not in themselves establish that money growth must be useful in forecasting inflation, either in the short run or over a longer run. Hence they provide little support for the ECB's monetary 'pillar'.
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Woodford, M. 2007. 'Does a 'Two-Pillar Phillips Curve' Justify a Two-Pillar Monetary Policy Strategy?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6447