Broad Money Growth and Inflation in the United States

Liam P. Ebrill and Steven M. Fries
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Liam P. Ebrill: International Monetary Fund
Steven M. Fries: International Monetary Fund

IMF Staff Papers, 1991, vol. 38, issue 4, 736-750

Abstract: A U.S. inflation-forecasting model recently developed by the Federal Reserve--the so-called P* relationship--is analyzed. An innovation in that model is the significance of M2 velocity in predicting changes in inflation. However, this paper's empirical analysis indicates that an inflation equation in levels, rather than first differences, is more appropriate and reveals that the significance of M2 velocity is not robust to this alternative specification. Although there is a long-run relationship between M2 and the price level, the output gap in a Phillips curve model captures much of the short-run deviations from this relationship.

JEL-codes: E31 E37 E52 (search for similar items in EconPapers)
Date: 1991
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