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A Note of Caution on the Relation Between Money Growth and Inflation
Author:
Mr. Helge Berger
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,
Sune Karlsson
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Pär Österholm
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Series:
IMF Working Papers
Volume/Issue:
Volume 2023: Issue 137
Language:
English
Publication Date:
30 Jun 2023
DOI:
https://doi.org/10.5089/9798400244834.001
ISBN:
9798400244834
ISSN:
1018-5941
Pages:
18
Keywords:
Bayesian VAR; Time-varying parameters; Stochastic volatility; money growth; Euro area inflation; inflation response; trend inflation; response of shock; Inflation
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We assess the bivariate relation between money growth and inflation in the euro area and the United States using hybrid time-varying parameter Bayesian VAR models. Model selection based on marginal likelihoods suggests that the relation is statistically unstable across time in both regions. The effect of money growth on inflation weakened notably after the 1980s before strengthening after 2020. There is evidence that this time variation is related to the pace of price changes, as we find that the maximum impact of money growth on inflation is increasing in the trend level of inflation. These results caution against asserting a simple, time-invariant relationship when modeling the joint dynamics of monetary aggregates and consumer prices.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund