Economics, Econometrics and Finance
4 years ago

Financial Crisis Unveils Impact of Money on Euro Area Inflation

RePEc: Research Papers in Economics
Money and Inflation in the Euro Area during the Financial Crisis
Christian Dreger, Juergen Wolters

Paper Summary

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The article examines the relationship between money demand and inflation in the euro area during the financial crisis. By analyzing data and using cointegration analysis, the researchers found that M3 money evolution aligns with money demand, and inflation is influenced by asset prices and detrended output. Excess liquidity plays a significant role in inflation dynamics. Real money balances and inflation are not weakly exogenous, while real income, asset prices, and the term structure do not respond to deviations from long-run equilibria. A single money demand equation can provide reliable information for monetary policy decisions in real time.