Monetary Aggregates and Consumer Price Inflation in the Euro Area

In this paper we study the relationships between monetary aggregates M1, M2 and M3 and inflation (represented by HICP) using statistical analysis. We analyse the extent of correlations between money growth (M1, M2, and M3) and inflation at different frequencies and different points in time as well as the time-lag relationships between these variables. The analysis serves to verify the quantity theory of money for a transmission mechanism within the maximum period of 6 months. Our main focus is on correlations in the time interval from January 2010 until December 2014 which allows a meaningful and representative analysis. Our results indicate weak comovements between money growth and HICP inflation. Viewed from this perspective, money growth exhibited limited, if any, information for future inflationary developments in the euro area, which is in contrast to most of the previous literature using more conventional techniques. The evidence presented in this paper does not support the ECB's view on the importance of money growth for inflation and casts serious doubts concerning the rationale of monetary aggregates in the monetary strategy of the ECB.