DP5632 Interpreting Euro Area Inflation at High and Low Frequencies

Author(s): Katrin Assenmacher, Stefan Gerlach
Publication Date: April 2006
Keyword(s): frequency domain, inflation, money growth, quantity theory, spectral regression
JEL(s): C22, E3, E5
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5632

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.