Time Aggregation and the Relationship between Inflation and Money Growth

Abstract

Using panel data for 99 countries, we confirm that the measured elasticity of prices with respect to money is higher, and closer to unity, the higher is money growth and the longer the time horizon over which the data are averaged. We propose two explanations. In one, the true model of inflation involves a lagged response to money growth. In the other, there is negative correlation between shocks to inflation and money growth. Our empirical results can be explained if high–money‐growth countries have (i) shorter lags or (ii) less negative correlation, when compared to countries with low money growth.

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

“…This finding suggests that the quantity theory of money might be revealed at times of expansionary monetary policy or if central banks abandon their primary goal of stabilizing inflation near the target. The interpretation is in line with studies that have demonstrated that the measured elasticity of prices with respect to money is closer to unity when the money growth is high (Breuer et al, 2018;Gertler & Hofmann, 2018). This finding supports the allegation of Sargent and Surico (2011) that a significant, strong link between money growth and inflation can occur again if monetary authorities allow a persistent, significant increase in money growth.…”

“…This finding suggests that a house price boom or expansionary monetary policy might evoke quantity theoretic association. Such an interpretation is in line with studies that have demonstrated that the measured elasticity of prices with respect to money is closer to unity when the money growth is high (Breuer et al, 2018;Gertler & Hofmann, 2018). Thus, the sizable growth of money or credit often precedes asset price booms (Gerdesmeier, Reimers, & Roffia, 2010;Gunn, 2018), which can lead to the subsequent inflationary outburst (Roffia & Zaghini, 2007).…”

“…Instead, for the cycles from 8 (an upper bound of a typical business cycle) to 20 years (Figure 3), the bootstrap correlation coefficient was smaller than 0.3 for more than half of the countries and often negative after 1990 (Table A2). Breuer et al (2018) explain that the negative correlation in IT can be induced by countervailing shocks to money growth in response to inflation shocks. The study revealed a significant and positive bootstrap correlation coefficient greater than 0.5, but it did not exceed 0.7 in Australia, the Czech Republic, Norway, New Zealand, Iceland, Mexico, and Poland -the latter two countries had high average inflation in my sample of countries.…”

“…Moreover, the available post-crisis results are often not compared to the analogous findings for other inflation targeters and leading non-inflation targeters. The notable two exceptions are the articles of Breuer, Mcdermott, and Weber (2018) and Gertler and Hofmann (2018), which include the period until 2010 for 99 countries and until 2011 for 46 countries, respectively. However, the authors have constructed panels that do not include solely IT, limiting the possibility to draw IT-specific and country-specific conclusions.…”

Money and Growth in a MIU-Based Walrasian General Equilibrium Model

“…Another reason is that it is an easy way to enter real balances directly into the utility function. There is an extensive literature on the approach and empirical studies on monetary issues (e.g., Yip, 1992, Akinsola, 2017;and Breuer, et al, 2018). This study applies Zhang's MIU approach to determine money holdings by heterogenous households (Zhang, 2005.…”