Does high M4 money growth trigger large increases in UK inflation? Evidence from a regime-switching model
AbstractMarch 2007 saw an increase of 3.1% in UK inflation and triggered the first explanatory letter from the Governor of the Bank of England to the Chancellor of the Exchequer since the Bank of England was granted operational independence in May 1997. The letter gave rise to a lively debate on whether policymakers should pay attention to the link between inflation and M4 money growth. Using UK data since the introduction of inflation targeting in October 1992, we show that: (i) the relationship between inflation and M4 growth is not stable over time, and (ii) the tendency of M4 to exert inflationary pressures is conditional on annual M4 growth exceeding 9.8%. Above this threshold, the money effect on inflation is very small. The implication is that the Monetary Policy Committee should not be particularly worried for not paying close attention to M4 money movements when setting interest rates. Copyright 2009 , Oxford University Press.
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Bibliographic InfoArticle provided by Oxford University Press in its journal Oxford Economic Papers.
Volume (Year): 61 (2009)
Issue (Month): 1 (January)
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Other versions of this item:
- Costas Milas, 2007. "Does high M4 money growth trigger large increases in UK inflation? Evidence from a regime-switching model," Keele Economics Research Papers KERP 2007/07, Centre for Economic Research, Keele University.
- Costas Milas, 2007. "Does high M4 money growth trigger large increases in UK inflation? Evidence from a regime-switching model," Working Paper Series 25-07, The Rimini Centre for Economic Analysis, revised Jul 2007.
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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- Martin, Christopher & Milas, C, 2009.
"Causes of the Financial Crisis: An Assessment using UK Data,"
Department of Economics Working Papers
15961, University of Bath, Department of Economics.
- Christopher Martin & Costas Milas, 2009. "Causes of the Financial Crisis: an Assessment Using UK Data," Working Paper Series 10_09, The Rimini Centre for Economic Analysis, revised Jan 2009.
- Kulaksizoglu, Tamer & Kulaksizoglu, Sebnem, 2009. "The U.S. Excess Money Growth and Inflation Relation in the Long-Run: A Nonlinear Analysis," MPRA Paper 23780, University Library of Munich, Germany.
- repec:eid:wpaper:18/09 is not listed on IDEAS
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