Inflation and monetary dynamics in the USA: a quantity-theory approach

• Published in: Applied economics Vol. 39; no. 2; pp. 229 - 244
• Main Authors: Morana, Claudio, Bagliano, Fabio Cesare
• Format: Journal Article
• Language: English
• Published: London Routledge 01.02.2007; Taylor and Francis Journals; Taylor & Francis Ltd
• Series: Applied Economics
• Subjects: Cointegration; Cointegration analysis; Empirical research; Inflation rate; Inflation rates; Monetary economics; Monetary growth; Monetary models; Monetary policy; Monetary theory; Quantity theory of money; Studies; U.S.A; United States > US
• ISSN: 0003-6846; 1466-4283
• DOI: 10.1080/00036840500428047

In this article we investigate the long-run link between inflation and money growth in the United States since 1960. A measure of the long-run inflation trend is constructed, which bears the interpreation of 'monetary' inflation rate and is directly related to the excess nominal money growth process (money growth less output growth), as postulated by the quantity theory. Consistent with the memory characteristics of the series, their fractional integration and cointegration properties are taken into account in empirical modelling. The proposed measure is then compared with several existing measures of 'core inflation', aimed at capturing long-run inflation dynamics but unrelated to money growth. The 'monetary' long-run inflation rate performs well in out-of-sample forecasting exercises especially over a 2-3-year horizon, yielding valuable information to monetary policymakers.