A note on the hidden risk of inflation

Makram El-Shagi and Sebastian Giesen

Journal of Economic Policy Reform, 2014, vol. 17, issue 1, 91-97

Abstract: The continued expansionary policy of the Federal Reserve gives rise to speculation whether the Fed will be able to maintain price stability in the coming decades. Most of the scientific work relating money to prices relies on broad monetary aggregates (i.e. M2 for the United States). In our paper, we argue that this view falls short. The historically unique monetary expansion has not yet fully reached M2. Using a cointegration approach, we aim to show the hidden risks for the future development of M2 and correspondingly prices. In a simulation analysis we show that even if the multiplier remains substantially below its pre-crisis level, M2 will exceed its current growth path with a probability of 95%.

Date: 2014
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DOI: 10.1080/17487870.2013.848054

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