Abstract:
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.
JEL classification: C22, E3, E5
Keywords: spectral regression, frequency domain, quantity theory, inflation, money growth