An Empirical Study of the Correlation between the Monetary Aggregates and the Price Level in Euro Area in the Years 2004 - 2013

The historical evidence suggests a high correlation between changes in the stock of money per unit of output and changes in prices in the same direction. The goal of this paper is to analyze the correlation between the monetary aggregates and the price stability before, during and after the financial and debt crisis in the European Monetary Union. For this purpose, firstly, the paper includes some basic theoretical aspects, secondly, practical analysis based on the Pearson product-moment correlation coefficient as a degree of the dependence between the monetary aggregate M3 and the harmonized index of consumer prices. The main task of the present paper is, accordingly, to consider, if there is any relationship between these variables, and whether there is any substantial reason for modifying the current mainstream mode of the policy analysis. The data were obtained from the data warehouses of the European Central Bank and the Statistical Office of the European Community (Eurostat). The obtained data were split up into 4 segments by the timetable of the period before the crisis, during the first and the second stage of the crisis and after the crisis. The base for the analysis was the quantitative theory of money, which states that money supply has the direct, proportional relationship with the price level. In general, we were able to identify the existence of very strong dependency between the content of monetary aggregate M3 and the price level measured by HICP, especially in the case when the data were not influenced by the seasonal aspects and within the delay of one month. It means that the transmission of monetary policy of ECB reacted relatively fast. On the other hand, the rapidity of transmission of monetary policy and its effectiveness is still not at the same level as it was in the period before the crisis and the influence of the crisis is still strongly visible.