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Euro area monetary policy indicators July 2010
Money market interest rates Money growth, 12-month
Taylor rule ECB forward-looking real-time Taylor rule
McCallum-type M3 money growth rule P* price-gap model
Yield spread indicator Money velocity
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
1995.12 1997.12 1999.12 2001.12 2003.12 2005.12 2007.12 2009.12
12-month %change
M1 M3 M3 reference
0
1
2
3
4
5
6
7
8
9
10
1993.12 1996.12 1999.12 2002.12 2005.12 2008.12
percent p.a.
3-month 10-year spread
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
1993.4 1995.4 1997.4 1999.4 2001.4 2003.4 2005.4 2007.4 2009.4
percent p.a.
0% 1% 2% 3% 4% Interbank/EONIA
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
1993.4 1995.4 1997.4 1999.4 2001.4 2003.4 2005.4 2007.4 2009.4
percent p.a.
4% 3% 2% 1% 0% M3 growth
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
1979.4 1982.4 1985.4 1988.4 1991.4 1994.4 1997.4 2000.4 2003.4 2006.4 2009.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
log M3vel (left) M3vel trend (1980-2001) log M1vel (right)
-10
-5
0
5
10
15
20
1979.4 1982.4 1985.4 1988.4 1991.4 1994.4 1997.4 2000.4 2003.4 2006.4 2009.4
-2
0
2
4
6
8
10
P* price gap (left) PGDP inflation (right) HICP inflation (right)
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
1997.12 1999.12 2001.12 2003.12 2005.12 2007.12 2009.12
percent p.a.
Interbank/EONIA Taylor rule Econ Taylor rule SPF
Notes:
Money growth: Amounts outstanding. Corrected for EA composition breaks using notional money stock index calculated by ECB.
Money velocity: Nominal GDP divided by money stock. Historical money from ECB database. Historical GDP (and RGDP and PGDP) from Brand-Cassola (2000) based on fixed conversion rates.
Taylor rule: Quarterly actual interbank/EONIA interest rate and the rate implied by the adjusted Taylor (1993) equation, using lagged values:
i* = 2.5 + dp* + 1.5*[dp(t-1)-dp*] + 0.5*[y(t-1)-y*(t-1)].
Five alternative target inflation rates dp* = 0, 1, 2, 3, 4. Inflation dp is the 12-month change in the euro area HICP (quarter average). Output gap y-y* is the percentage deviation of actual euro area real GDP from trend or potential GDP estimated by the
OECD. Output gap estimates are the most recent estimates and therefore not real time. Equilibrium real interest rate is set at 2.5%.
See Taylor (1993), Discretion versus policy rules in practice, Carnegie-Rochester Conference Series on Public Policy, vol.39 December: 195-214.
Forward-looking real-time Taylor rule: Monthly actual interbank/EONIA interest rate and the rate implied by an adjusted Taylor (1993) equation, using expected inflation and quasi real-time output gap.
i* = 2.0 + dp* + 1.5*[Edp(t+12)-dp*] + 0.5*[y(t-3)-y*(t-3)].
One 12-month forward expected inflation Edp(t+12) is calculated from The Economist monthly consensus forecasts, as a weighted average of current and next year CPI inflation. The second expected inflation is from the quarterly ECB SPF. Output gap
estimates are calculated from first-release observations of quarterly GDP and semi-annual values of OECD estimates of annual output gaps and annual potential GDP growth. Output gap monthly values are equal within the same quarter. The inflation target is
2% and the equilibrium real interest is 2%. Lower bound is zero.
McCallum M3 money growth rule: Quarterly actual 12-month M3 money growth and the rate implied by theMcCallum/Meltzer rule applied for M3 money growth:
dm3* = dp* + 400*[y(t-1)-y(t-41)]/40 + 400*[v3(t-1)-v3(t-17)]/16.
Five alternative target inflation rates dp*. The original monetary base growth of the McCallum/Melzter rule is replaced with M3 money growth dm3. The rule uses a 10-year moving average growth rate of real GDP and a 4-year average growth rate of money
velocity.
See Meltzer (1987), Limits of short-run stabilization policy, Economic Inquiry, vol.25 (1) January 1987: 1-14. McCallum (1988), Robustness properties of a rule for monetary policy, Carnegie-Rochester Conference Series on Public Policy, vol.29 Autumn:
173-204. McCallum (1993), Specification and analysis of a monetary policy rule for Japan, Bank of Japan Monetary and Economic Studies, vol.11 (2) November: 1-45.
P* inflation model: Actual 4-quarter inflation in the Eurozone GDP price deflator and the (log) price gap (p*-p). The P* value in the price gap measures the equilibrium price level derived from the quantity theory, (in logarithms) p* = m + v* - y*, where m
is current M3 money stock, v* is the trend M3 velocity, and y* is the trend of real GDP. A positive price gap (p*-p) is taken as indication of future price pressure, because actual price level p will converge to equilibrium price level p*.
See Hallman, Porter, and Small, (1989), M2 per unit of potential GNP as an anchor for the price level, Staff Study nº 157, Board of Governors of the Federal Reserve System. Hallman, Porter and Small (1991), Is the price level tied to the M2 monetary
aggregate in the long run?, American Economic Review, vol.81 (4): 841-858.
0
1
2
3
4
5
6
7
8
1993.12 1995.12 1997.12 1999.12 2001.12 2003.12 2005.12 2007.12 2009.12
percent p.a.
Interbank/EONIA ECB repo ECB deposit rate ECB marginal lending rate
