Boro, Claudio, and Philip Lowe, 2002, “Asset Prices, Financial and Monetary Stability: Exploring the Nexus,” BIS Working Papers No. 114.
Christiano, Lawrence J., and Massimo Rostagno, 2001, “Money Growth Monitoring and the Taylor Rule,” NBER Working Paper No. 8539.
Gerlach, Stefan, and Lars E.O. Svensson, 2002, “Money and Inflation in the Euro Area: A Case for Monetary Indicators?,” Available at: http://www.princeton.edu/~svensson.
Harvey, Andrew C., and Albert Jaeger, 1993, “Detrending, Stylized Facts and The Business Cycle,” Journal of Applied Econometrics, 8, pp. 231–47.
Issing, Otmar, 2000, “Communication Challenges for the ECB,” Opening Statement CFS Conference “The ECB and its Watchers II,” at: http://www.ecb.int/kev/sp000626_2.htm.
Issing, Otmar, Gaspar, Vitor, Angeloni, Ignazio, Oreste Tristani, 2001, “Monetary Policy in the Euro Area,” Cambridge University Press.
Jordan, Thomas, Peytrignet, Michel, and Georg Rich, 2000, “The Role of M3 in the Policy Analysis of the Swiss National Bank,” in: Seminar on Monetary Analysis: Tools and Applications, European Central Bank.
King, Mervyn, 2002, “No Money, No Inflation—The Role of Money in the Economy,” Bank of England Quarterly Bulletin, Summer 2002, pp. 162–77.
Laxton, Douglas, and Papa N’Diaye, 2002, “Monetary Policy Credibility and the Unemployment-Inflation Tradeoff: Some Evidence from Seventeen OECD Countries,” (mimeo.).
McCallum, Bennett T., 1984, “On Low-Frequency Estimates of Long-Run Relationships in Macroeconomics,” Journal of Monetary Economics, 14, pp. 3–14.
Schaechter, Andrea, Mark R. Stone, and Mark Zelmer, 2000, “Adopting Inflation Targeting: Practical Issues for Emerging Market Economies,” IMF Occasional Paper No. 202.
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ECB (1999, p. 47), Monthly Bulletin, January.
Later in December 1998, the Governing Council set the reference value for M3 growth at 4½ percent, reflecting assumptions of 2-2½ percent growth of real potential output and a trend decline in M3 velocity of ½-1 percent. The specified ranges for output and velocity growth in combination with the 4½ percent reference value appear to signal a commitment to aim at long-run inflation to remain in a range of 1-2 percent.
For example, while the 2002 CEPR report by Begg et.al. “Monitoring the European Central Bank” is highly critical of the ECB’s strategy, the report concludes that the ECB’s policy stance had responded well to a difficult macroeconomic environment.
All quotes are taken from an article on the “Framework and Tools of Monetary Analysis” in ECB (2001, pp. 41-58), Monthly Bulletin, May.
See, for example, the unobserved components analysis of the U.S. business cycle in Harvey and Jaeger (1993).
Inflation rates are based on the price deflator for private consumption expenditure. The reference to “good fit” is relative to more general ARMA models of inflation, with the degree of fit measured by conventional information criteria. There is, however, some evidence that modeling π* as a time-varying inflation objective (e.g. as a random walk) improves the fit of the equations for most countries, but without affecting the substance of the conclusions.
This is stylized characterization of actual practices as regards point targets, target ranges, and target horizons. See Schaechter, Stone, and Zelmer (2000, pp. 6-14) for detailed descriptions of actual inflation targeting practices.
Low persistence of the inflation process appears to be the hallmark of the (very) short-time series on inflation generated by the inflation targeting regimes in New Zealand, Canada, the United Kingdom, and Sweden since 1993: estimates of AR (1) processes for these countries’ annual CPI data suggest that ση was generally in the range 0.75-1.00 while φ was close to zero (if not negative in some countries) during 1993-2001.
Milton Friedman (1962, p. 53-54) appears to have dismissed inflation targeting as a viable policy strategy out of doubts that the implied “flattening of the inflation rate spectrum” is feasible: “There is unquestionably a close connection between monetary actions and the price level. But the connection is not so close, so invariable, or so direct that the objective of achieving a stable price level is an appropriate guide to the day-to-day activities of the authorities. … In the present state of our knowledge, it seems to me desirable to state the rule in terms of the behavior of the stock of money.”
Shocks to difference-stationary time series processes have permanent effects only on the level of the series, but their growth rates are stationary around a constant mean.
Christiano and Rostagno (2001) study several analytical examples illustrating that monitoring money growth can be a good insurance practice for monetary policy; in their examples, following an inflation targeting (Taylor) rule can leave the economy without a long-run anchor.
Lucas (1980) used frequency domain techniques to study the long-run link between money and inflation. See McCallum (1984) for a critique of attempts to test macroeconomic theories using these techniques. This paper uses frequency domain analysis only to bring out stylized facts.
The results of frequency domain analysis based on relatively small sample sizes can be quite sensitive to prefiltering (“pre-whitening’) of the data and the type of “spectral window” used for calculating the cross-spectrum. Some robustness analysis suggested that the lower-frequency results shown in are quite sturdy, but the coherence estimates at the business-cycle frequency can be sensitive to prefiltering without affecting the overall conclusions of this section.
The part of this section on the Bundesbank’s monetary targeting experience considers an approach to modeling inflation expectations and credibility that allows time-variation in φ.
Because the analysis uses annual data, the HP filter smoothing constant was fixed at 100. A more subtle approach would base the long-run estimates of velocity and potential output on explicit unobserved components modeling-but the gains in insights relative to using the paper’s simple HP filtering approach appear to be modest.
All data series are taken from the Commission’s data base. The change in the terms of trade is the difference between export and import price inflation for goods and services.
Germany’s year-on-year inflation targets implicit in the money growth targets (base money during 1974-87 and M3 during 1988-98) during this period were at times above 2 percent.
The opposite view, namely that the Bundesbank’s monetary policy strategy succeeded despite its monetary targeting approach, has, however, many adherents.
“No Money, No Inflation,” Bank of England Quarterly Bulletin, Summer 2002 (p. 174).