Inflation and monetary dynamics in the USA: a quantity-theory approach

Claudio Morana and Fabio Bagliano

Applied Economics, 2007, vol. 39, issue 2, 229-244

Abstract: In this article we investigate the long-run link between inflation and money growth in the United States since 1960. A measure of the long-run inflation trend is constructed, which bears the interpreation of 'monetary' inflation rate and is directly related to the excess nominal money growth process (money growth less output growth), as postulated by the quantity theory. Consistent with the memory characteristics of the series, their fractional integration and cointegration properties are taken into account in empirical modelling. The proposed measure is then compared with several existing measures of 'core inflation', aimed at capturing long-run inflation dynamics but unrelated to money growth. The 'monetary' long-run inflation rate performs well in out-of-sample forecasting exercises especially over a 2-3-year horizon, yielding valuable information to monetary policymakers.

Date: 2007
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DOI: 10.1080/00036840500428047

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