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

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Author Info
Claudio Morana
Fabio Cesare Bagliano

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Abstract

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.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Economics.

Volume (Year): 39 (2007)
Issue (Month): 2 (February)
Pages: 229-244
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Handle: RePEc:taf:applec:v:39:y:2007:i:2:p:229-244

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bagliano, Fabio C & Golinelli, Roberto & Morana, Claudio, 2002. "Core Inflation in the Euro Area," Applied Economics Letters, Taylor and Francis Journals, vol. 9(6), pages 353-57, May. [Downloadable!] (restricted)
  2. Diebold, Francis X. & Inoue, Atsushi, 2001. "Long memory and regime switching," Journal of Econometrics, Elsevier, vol. 105(1), pages 131-159, November. [Downloadable!] (restricted)
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  3. Ang, Andrew & Bekaert, Geert, 2002. "Regime Switches in Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 163-82, April.
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  4. Bennett T. McCallum, 2001. "Monetary Policy Analysis in Models Without Money," NBER Working Papers 8174, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. De Grauwe, Paul & Polan, Magdalena, 2001. "Is Inflation Always and Everywhere a Monetary Phenomenon?," CEPR Discussion Papers 2841, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. Timothy Cogley, 1998. "A simple adaptive measure of core inflation," Working Papers in Applied Economic Theory and Econometrics 98-06, Federal Reserve Bank of San Francisco. [Downloadable!]
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  7. Philip Hans Franses & Marius Ooms & Charles S. Bos, 1999. "Long memory and level shifts: Re-analyzing inflation rates," Empirical Economics, Springer, vol. 24(3), pages 427-449. [Downloadable!] (restricted)
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  8. Bos, Charles S. & Franses, Philip Hans & Ooms, Marius, 2002. "Inflation, forecast intervals and long memory regression models," International Journal of Forecasting, Elsevier, vol. 18(2), pages 243-264. [Downloadable!] (restricted)
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  9. Gerlach, Stefan & Svensson, Lars E. O., 2003. "Money and inflation in the euro area: A case for monetary indicators?," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1649-1672, November. [Downloadable!] (restricted)
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  10. Paul De Grauwe & Magdalena Polan, 2001. "Is Inflation Always and Everywhere a Monetary Phenomenon?," International Economics Working Papers Series wpie009, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics. [Downloadable!]
  11. Kasa, Kenneth, 1992. "Common stochastic trends in international stock markets," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 95-124, February. [Downloadable!] (restricted)
  12. Hassler, Uwe & Wolters, Jurgen, 1995. "Long Memory in Inflation Rates: International Evidence," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 37-45, January.
  13. Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  14. George T. McCandless, Jr. & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11. [Downloadable!]
  15. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-58, September. [Downloadable!] (restricted)
  16. Nicoletta Batini & Edward Nelson, 2001. "The Lag from Monetary Policy Actions to Inflation: Friedman Revisited," Discussion Papers 06, Monetary Policy Committee Unit, Bank of England. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fabio C. Bagliano & Claudio Morana, 2007. "Business Cycle Comovement in the G-7: Common Shocks or Common Transmission Mechanisms?," Carlo Alberto Notebooks 40, Collegio Carlo Alberto. [Downloadable!]
  2. Fabio C. Bagliano & Claudio Morana, 2006. "International Macroeconomic Dynamics: A Factor Vector Autoregressive Approach," Carlo Alberto Notebooks 32, Collegio Carlo Alberto. [Downloadable!]
    Other versions:
  3. Richard T. Baille & Claudio Morana, 2009. "Investigating Inflation Dynamics and Structural Change with an Adaptive ARFIMA Approach," ICER Working Papers - Applied Mathematics Series 06-2009, ICER - International Centre for Economic Research. [Downloadable!]
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