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Is the Quantity Theory of Money Useful in Forecasting U.S. Inflation?

Markku Lanne, Jani Luoto and Henri Nyberg

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We propose a new simple model incorporating the implication of the quantity theory of money that money growth and inflation should move one for one in the long run, and, hence, inflation should be predictable by money growth. The model fits postwar U.S. data well, and beats common univariate benchmark models in forecasting inflation. Moreover, this evidence is quite robust, and predictability is found also in the Great moderation period. The detected predictability of inflation by money growth lends support to the quantity theory.

Keywords: Money growth; transfer function model; low-pass filter (search for similar items in EconPapers)
JEL-codes: C22 E31 E40 E51 (search for similar items in EconPapers)
Pages: 25
Date: 2014-08-22
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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