Money growth, output gaps and inflation at low and high frequency: Spectral estimates for Switzerland

While central banks generally have abandoned monetary targeting, many continue to attach weight to monetary aggregates in setting policy. This raises the issue of how money can be combined with other variables when analysing inflation. We decompose inflation in Switzerland into two frequency bands and show that inflation is Granger caused by monetary factors at low frequencies, defined as those corresponding to periodicities of more than 4 years, but is Granger caused by the output gap at high frequencies. We also estimate Phillips curve models that are augmented by the low-frequency components of the monetary factors.