Money Growth and Inflation: New Evidence from a Nonlinear and Asymmetric Analysis

Abstract

The relationship between money growth and inflation is a topic of debate among macroeconomists. This paper contributes to the empirical literature on the money‐inflation pass‐through using a Nonlinear Auto‐Regressive Distributed Lag model (NARDL) for three countries (the U.S., U.K. and Japan) over an estimation period spanning 1950Q1 to 2014Q4. This methodology allows for empirical tests of short‐ and long‐run asymmetric responses of inflation to both positive and negative shocks affecting money growth of three monetary aggregates (M1, M2, M0). The results reveal that inflation responds asymmetrically to monetary shocks in the long‐run for all three countries. Robustness tests are also undertaken by carrying out the Hatemi‐J (Empirical Economics, Vol. 43 (2012), pp. 447–456) causality test and splitting the sample period into two, before and after the financial crisis. The findings indicate the existence of a relation between money growth and inflation in the post‐crisis period only in the case of the U.K. When we use different break points, we find that the symmetric relationship more likely occurs in the post‐crisis period.

Investigating the Relationship between Money Growth and Inflation in Turkey: A Nonlinear Causality Approach

“…Although there has been no similar study for the Turkish economy, findings of this study confirm Hamilton (1994) viewpoint, and like Amisano and Colavecchio (2013), Amisano and Fagan (2013), Cooray andKhraief (2019), andEltejaei (2020) showed that the causal relationship between money growth and inflation despite theoretical literature is not linear necessarily.…”

“…Thus, money growth is an important early warning indicator of risks to price stability. For the U.S., the U.K., and Japan, Cooray, and Khraief (2019) applied Nonlinear Auto-Regressive Distributed Lag (NARDL) model and found that inflation responded asymmetrically to monetary shocks in the long-run for the period 1950:1-2014:4. Eltejaei (2020), using an MS-VAR model, showed that three different regimes could be identified for money growth and inflation in Iran during the 1961-2017 period.…”

“…Nevertheless, there are only a few empirical studies like Amisano and Colavecchio (2013), Amisano and Fagan (2013), Cooray and Khraief (2019), and Eltejaei (2020), that, unlike the conventional literature, have supposed a nonlinear relationship between money and inflation. Supposing linearity in most studies has reduced their accuracy.…”

The asymmetric effects of fiscal policy on inflation and economic activity in post-communist European countries

“…For Bulgaria and the Czech Republic, the effect of fiscal policy on inflation does not stabilise in the long run, and has a mixture of short-run effects, which are both positive and negative. This shows that for the two economies, the possible inflationary effects are counterbalanced by efficient monetary policies (Cooray & Khraief, 2019;Sriyana, 2019).…”

Money and inflation in inflation-targeting regimes – new evidence from time–frequency analysis

“…In the literature, the confusion over the significance of the relationship between money growth and inflation stems from the deterioration of the relationship in lowinflation environments, on the one hand (Sargent & Surico, 2011), and the evidence that has presented a strong link between money and inflation, on the other hand (Cooray & Khraief, 2019;Fedotenkov, 2018).…”