Does Money Growth Predict Inflation? Evidence from Vector Autoregressions Using Four Centuries of Data

In this paper, we add new evidence to a long-debated macroeconomic question, namely whether money growth has predictive power for inflation or, put differently, whether money growth Granger causes inflation. We use a historical dataset – consisting of annual Swedish data on money growth and inflation ranging from 1620 to 2021 – and employ state-of-the-art Bayesian estimation methods. Specifically, we employ VAR models with drifting parameters and stochastic volatility which are used to conduct analysis both within- and out-of-sample. Our results indicate that the within-sample analysis – based on marginal likelihoods – provides strong evidence in favour of money growth Granger causing inflation. This strong evidence is, however, not reflected in our out-of-sample analysis, as it does not translate into a corresponding improvement in forecast accuracy.