Decomposition of Inflation and its Volatility: A Stochastic Approach

A. G. Malliaris and Mary Malliaris
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A. G. Malliaris: Department of Economics and Department of Management Science, Loyola University of Chicago, 820 N. Michigan Avenue, Chicago, Illinois 60611, USA
Authors registered in the RePEc Author Service: Anastasios G. Malliaris

Chapter 5 in Economic Uncertainty, Instabilities and Asset Bubbles:Selected Essays, 2005, pp 29-39 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper presents a decomposition of inflation and its volatility. According to the traditional quantity theory of money, the rate of inflation is decomposed into three components: the rate of change in the money supply, plus the rate of change in the velocity of circulation, minus the rate of change in real output. We derive a generalization of this decomposition by postulating that the rate of change of money supply, velocity, and output follow diffusion equations. Using stochastic calculus techniques, two expressions are obtained decomposing inflation and its volatility as a sum of several economically important terms. We also use two sets of U.S. data to illustrate these decompositions with actual numbers.

Keywords: Asymptotic Economic Growth; Inflation; Interest Rates; Asset Pricing; Equity Markets; Foreign Currency; Monetary Policy; Crash (search for similar items in EconPapers)
JEL-codes: C58 C73 E31 E37 E43 G12 G17 (search for similar items in EconPapers)
Date: 2005
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Journal Article: Decomposition of Inflation and Its Volatility: A Stochastic Approach (1995)
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