Money and the Great Disinflation

No 2006-7, Working Papers from Swiss National Bank

Abstract: Using U.S. and euro area data, this paper presents a significant and proportional relationship between money growth and subsequent inflation when accounting for equilibrium velocity movements due to inflation regimes changes. These movements, driven by money demand adjustments to low-frequency Fisherian interest rate variations, are derived from consistent U.S. and euro area money demand specifications - after contradictory coexisting results are explained. Not accounting for equilibrium velocity and interest rate movements biases cross-country and time series dynamic money growth / inflation estimated relationships, and leads to the non-proportional, non-significant, and reverse causality results found in studies that include the post-1980 period.

Keywords: money growth; inflation; equilibrium velocity; quantity theory; money demand (search for similar items in EconPapers)
JEL-codes: E31 E41 E52 E58 (search for similar items in EconPapers)
Date: Written 2006-01-01
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