Broad Divisia Money, Supply Pressures, and U.S. Inflation Following the COVID-19 Recession

Michael Bordo, John Duca and Barry Jones

No 34017, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The rise of U.S. inflation in 2021 and 2022 and its partial subsiding have sparked debates about the relative role of supply and demand factors. The initial surge surprised many macroeconomists despite the unprecedented jump in money growth in 2020-21. We find that the relationship between consumption and the theoretically based Divisia M3 measure of money (velocity) can be well modeled both in the short- and long-runs. We use the estimated long-run relationship to calculate the deviation of actual velocity from its long-run equilibrium and incorporate it into a P-Star framework. Our model of velocity significantly improves the performance of the P-Star model relative to using a one-sided HP filter to calculate trend velocity as, for example, used by Belongia and Ireland (2015, 2017). We also include a global supply pressures index in the model and find that recent movements in U.S. inflation largely owed to aggregate demand driven macroeconomic factors that are tracked by Divisia money with a smaller role played by supply factors.

JEL-codes: E41 E51 E52 E58 (search for similar items in EconPapers)
Date: 2025-07
Note: ME
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