A Note of Caution on the Relation Between Money Growth and Inflation
June 30, 2023
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Summary
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.
Keywords: Bayesian VAR, Euro area inflation, Inflation, inflation response, money growth, response of shock, Stochastic volatility, Time-varying parameters, trend inflation
Pages:
18
Volume:
2023
DOI:
Issue:
137
Series:
Working Paper No. 2023/137
Stock No:
WPIEA2023137
ISBN:
9798400244834
ISSN:
1018-5941
