Publication of the week: Dr Juan Castañeda27 August 2014
José Luis Cendejas, Félix-Fernando Muñoz & Juan E. Castañeda, “When Money Matters: Some Policy Lessons from the Business Cycle in Spain, 1998–2013”, World Economics 15.2 (June 2014), 77-110
The severe financial crisis that grips Spain has multiple causes. One has been the massive and continued expansion of the money supply since Spain’s accession to the Eurozone, and the non-negligible effects of this expansion on asset prices as well as on the structure of the economy. The article analyses the main hypotheses underlying the mainstream macroeconomic models used in recent years to explain inflation and its relation to money. The authors then apply an ‘unobserved component model’ to test for the cyclical relation between money growth, inflation, asset (stock and real estate) prices and real GDP in Spain from 1998 to 2013. Based on the Spanish experience, the main finding is that, even though the money supply has become endogenous within the monetary strategy developed by the US Federal Reserve and the European Central Bank in recent times, the broad money supply and asset prices have shared the same cyclical component in the latest business cycle (1998–2013).
Dr Juan Castañeda is Lecturer in Economics at Buckingham.