A Note of Caution on the Relation Between Money Growth and Inflation

By Helge Berger, Sune Karlsson, Pär Österholm

June 30, 2023

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Helge Berger, Sune Karlsson, and Pär Österholm. A Note of Caution on the Relation Between Money Growth and Inflation, (USA: International Monetary Fund, 2023) accessed October 6, 2024

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.

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.

Subject: Inflation, Prices

Keywords: Bayesian VAR, Euro area inflation, Inflation, Inflation response, Money growth, Response of shock, Stochastic volatility, Time-varying parameters, Trend inflation

Publication Details

Pages:

18
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/137
Stock No:

WPIEA2023137
ISBN:

9798400244834
ISSN:

1018-5941

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