A note of caution on the relation between money growth and inflation

Abstract

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.

One Hundred Inflation Shocks: Seven Stylized Facts

“…We estimate real interest rates in an ex-post manner, as nominal interest rates less inflation rates (both in a given year t). For monetary aggregates,Berger, Karlsson and Österholm (2023) confirm that these were closely related to inflation outcomes during the oil crises.©International Monetary Fund. Not for Redistribution…”