A Note of Caution on the Relationship between Money Growth and Inflation
The authors of this WP/23/137IMF Working Paper examine the relationship between money growth and inflation in the euro area and the United States using hybrid time-varying parameter Bayesian VAR models. The results suggest that the relationship between the two variables is statistically unstable across time in both regions. The effect of money growth on inflation weakened after the 1980s, but strengthened after 2020. The authors also find evidence that the time variation in this relationship is related to the pace of price changes, as the maximum impact of money growth on inflation is increasing in the trend level of inflation. These findings caution against assuming a simple, stable relationship between money growth and inflation.
