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Inflation and Money Growth: Evidence from a Multi-Country Data-Set

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Author Info
Frain, John C. (Central Bank and Financial Services Authority of Ireland)

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Abstract

Using a multi-country dataset extracted from the International Monetary Fund IFS database, I find a strong correlation between average growth rates of various monetary aggregates and average inflation. The correlations remain strong when countries with higher average inflation rates are removed from the sample. My results confirm the strong correlations found in the literature and in particular in McCandless and Weber (1995). However they contradict those in De Grauwe and Polan (2001) who, in a similar analysis, find that the strong link is almost wholly due to the presence of high or hyperinflation countries in the sample. They find that the relationship between inflation and money growth for low inflation countries (on average less than $10%$ per annum over the last 40 years) is weak. In this study strong correlations are found even if such countries are removed from my sample. The findings in this study are confirmed by two further analyses of the relationship between money growth and inflation in each individual country included in my sample. The first analysis shows that within two years almost all countries show a significant pass-through of monetary shocks to inflation. The second analysis estimates significant long run relationships between inflation and excess money creation in each country. The signi ficance of these results is not dependent on the level of inflation in the individual countries. The results confirm the importance of a monetary analysis in a monetary policy strategy

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Paper provided by Central Bank & Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers with number 7/RT/03.

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Length: 41 pages
Date of creation: Oct 2003
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Handle: RePEc:cbi:wpaper:7/rt/03

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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. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July. [Downloadable!] (restricted)
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  2. 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)
  3. Gerald P. Dwyer, Jr. & R.W. Hafer, 1999. "Are money growth and inflation still related?," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 32-43. [Downloadable!]
  4. 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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  5. Laurence H. Meyer, 2001. "Does money matter?," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-16. [Downloadable!]
  6. George T. McCandless, Jr. & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11. [Downloadable!]
  7. Frain, John C., 2003. "Inflation and Money Growth: Evidence from a Multi-Country Data-Set," Research Technical Papers 7/RT/03, Central Bank & Financial Services Authority of Ireland (CBFSAI). [Downloadable!]
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  1. John C. Frain, 2004. "Inflation and Money Growth - Evidence from a Multi-Country Data-Set," The Economic and Social Review, Economic and Social Studies, vol. 35(3), pages 251-266. [Downloadable!]
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