Abstract
SummaryMonetary aggregates have historically been important in Swiss monetary policy. The Swiss National Bank used money growth targets until 1999. The new policy framework introduced in 2000 focuses on an inflation forecast that relies on money growth as an indicator. How useful is money growth for explaining inflation in Switzerland? Using data spanning 1979 to 2007, we estimate a Phillips curve model that incorporates a measure of “trend” money growth and find that it impacts on inflation if one takes the downward shift in nominal interest rates over the sample into account. Including money growth reduces the in-sample forecasting errors by 15%.
Highlights
Inflation is commonly seen as a monetary phenomenon
These models fit the inflation dynamics in the euro area rather well, and the analysis presented below uses the same approach for Switzerland
This paper studies the role of money growth for inflation in Switzerland using quarterly data spanning 1979:4 to 2007:1, where the starting date is chosen to coincide with the Swiss National Bank (SNB)’s return to monetary targets
Summary
Inflation is commonly seen as a monetary phenomenon. Despite this, it has been argued that money growth is not a useful predictor of changes in the price level in economies with low inflation. As a consequence, most central banks in such economies attach little importance to money in setting interest rates. The information from these two sets of indicators is combined with the output from the econometric models (which typically include monetary aggregates) to yield the inflation forecast on which policy decisions are based This obviates the need for cross-checking as at the ECB and does not require the use of a reference value for the growth rate of M3.5. Neumann (2003) propose Phillips curve models in which inflation depends on the low-frequency component of changes in M3, which they argue represents the first pillar, and on the output gap, which captures the second pillar These models fit the inflation dynamics in the euro area rather well, and the analysis presented below uses the same approach for Switzerland.
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