Acta Univ. Agric. Silvic. Mendelianae Brun. 2007, 55, 57-66

https://doi.org/10.11118/actaun200755030057
Published online 2014-11-26

Money supply growth and inflation – the monetary policy strategy of the European Central Bank

Svatopluk Kapounek, Lubor Lacina

Ústav financí, Mendelova zemědělská a lesnická univerzita v Brně, Zemědělská 1, 613 00 Brno, Česká republika

The main aim of this article is to find out whether there is a significant relationship between money supply growth and inflation in the Eurozone. For this reason, the monetary policy strategy of the European Central Bank (ECB) has been evaluated. Since the establishment of the ECB in January 1999 to May 2003 the ECB‘s monetary policy strategy consisted of three main elements: a quantitative definition of price stability, a prominent role for money in the assessment of risks to price stability (aggregate M3 as a reference value), and a broadly based assessment of the outlook for price developments. Nevertheless, since May 2003 M3 or any other monetary aggregate has lost its prominent role in the ECB‘s strategy. Therefore the nowadays ECB‘s monetary policy strategy consists of a quantitative definition of the primary objective of price stability and an analytical framework based on two pillars – economic analysis and monetary analysis. These two pillars are used by the ECB‘s Governing Council in the overall assessment of risks to price stability and in monetary policy decisions.
The empirical part of this article is based on time series correlation between money supply growth and inflation in selected member countries of the Economic and Monetary Union (EMU - Eurozone) during the period 1995–2005. The time series are divided into two parts. The first part covers data for selected member countries of the European Union from 1995 till 1998, i.e. before the establishment of the EMU. Whereas the second part includes data for the whole Eurozone since its official start in 1999 to 2005. The time series are adjusted by SARIMA models.

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