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

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  • Frain, John C.

    (Central Bank and Financial Services Authority of Ireland)

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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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 7/RT/03.

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

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  1. Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers.
  2. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
  3. George T. McCandless, Jr. & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
  4. 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.
  5. 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.
  6. Laurence H. Meyer, 2001. "Does money matter?," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-16.
  7. 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 Studiƫn, International Economics.
  8. De Grauwe, Paul & Polan, Magdalena, 2001. "Is Inflation Always and Everywhere a Monetary Phenomenon?," CEPR Discussion Papers 2841, C.E.P.R. Discussion Papers.
  9. James A. Dorn, 2003. "Introduction," Cato Journal, Cato Journal, Cato Institute, vol. 23(1), pages 1-9, Spring/Su.
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Cited by:
  1. Dwyer, Gerald P. & Fisher, Mark, 2009. "Inflation and monetary regimes," Journal of International Money and Finance, Elsevier, vol. 28(7), pages 1221-1241, November.
  2. Frain, John C., 2003. "Inflation and Money Growth: Evidence from a Multi-Country Data-Set," Research Technical Papers 7/RT/03, Central Bank of Ireland.
  3. John Thornton, 2006. "The Intertemporal Relation Between Money And Prices In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 74(1), pages 59-64, 03.

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