Does money growth have causal effect across the US inflation distribution? Evidence from a P-star model

David Cronin and Niall McInerney

Macroeconomic Dynamics, 2026, vol. 30, e46

Abstract: A “two-regime” view of there being a strong positive relationship between money growth and inflation in high-inflation episodes and little relationship occurring between them otherwise has been restated of late. Using the P-star model, and Divisia money aggregates, we demonstrate money having explanatory power across US inflation’s conditional distribution over a near-60-year sample period. We find the price gap—the difference between the observed and the equilibrium price level—to be significant and of the expected sign, both when outliers are down-weighted and for most of the quantile range. While the impact of the price gap tends to be strongest when inflation is high, there is a significant monetary impulse to prices across the inflation distribution. Monetary transmission to prices occurs more strongly through the money market than the goods market. As well as providing evidence against the two-regime view, the novel quantitative approach to P-star estimation demonstrates the model’s versatility in showing money’s broadly-based influence on inflation.

Date: 2026
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