DP5723 Money Growth, Output Gaps and Inflation at Low and High Frequency: Spectral Estimates for Switzerland

Author(s): Katrin Assenmacher, Stefan Gerlach
Publication Date: June 2006
Keyword(s): frequency domain, Phillips curve, 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=5723

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.