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Assessing the causal relationship between Euro-area money and price in a time-varying environment

By Stephen G. Hall, George Hondroyiannis, P. A. V. B. Swamy and George S. Tavlas

Abstract

The paper provides new evidence on the causal relationship between money and price for the euro area using quarterly data for the period 1980 to 2006, employing two alternative methods of estimation: the vector error correction (VEC) and time-varying coefficient (TVC) estimation techniques. The latter technique has the advantage over the former technique in that it can deal with possible specification biases and spurious relationships that may have arisen from structural changes. The empirical results from the VEC method reveal a bidirectional causal relationship between money and price. Contrary, the results from the TVC technique suggest that money is acting as an exogenous process determining the price level

Topics: Causality, VEC, time varying coefficient estimation, Euro area
Publisher: Dept. of Economics, University of Leicester
Year: 2009
OAI identifier: oai:lra.le.ac.uk:2381/7610

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