A Note of Caution on the Relation Between Money Growth and Inflation

Helge Berger, Sune Karlsson () and Pär Österholm

No 2023/137, IMF Working Papers from International Monetary Fund

Abstract: We assess the bivariate relation between money growth and inflation in the euro area and the United States using hybrid time-varying parameter Bayesian VAR models. Model selection based on marginal likelihoods suggests that the relation is statistically unstable across time in both regions. The effect of money growth on inflation weakened notably after the 1980s before strengthening after 2020. There is evidence that this time variation is related to the pace of price changes, as we find that the maximum impact of money growth on inflation is increasing in the trend level of inflation. These results caution against asserting a simple, time-invariant relationship when modeling the joint dynamics of monetary aggregates and consumer prices.

Keywords: Bayesian VAR; Time-varying parameters; Stochastic volatility; money growth; Euro area inflation; inflation response; trend inflation; response of shock; Inflation (search for similar items in EconPapers)
Pages: 18
Date: 2023-06-30
New Economics Papers: this item is included in nep-eec, nep-his and nep-mon
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Journal Article: A note of caution on the relation between money growth and inflation (2023)
Working Paper: A Note of Caution on the Relation between Money Growth and Inflation (2023)
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