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Global liquidity, money growth and UK inflation

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  • Michael Ellington

    (University of Liverpool Management School, UK)

  • Costas Milas

    (University of Liverpool Management School, UK)

Abstract

This paper examines the inflationary impact of domestic and global liquidity conditions on UK inflation through the lens of monetary aggregates. To do so, we rely on standard linear models as well as non-linear models that allow for regime switching behaviour in terms of a contained regime (when domestic money growth is relatively concealed) versus an uncontained regime (when domestic money growth is unusually unconcealed). We find that global liquidity yields inflationary pressures in the UK over and above the impact of domestic money growth, spare capacity and money disequilibria (the latter accounting for the property sector and financial asset markets). All effects are regime-switching as they depend on whether domestic money growth is contained within or exceeds threshold boundaries. Finally, broad (M4) money has greater explanatory power than divisia money in modelling UK inflation.

Suggested Citation

  • Michael Ellington & Costas Milas, 2014. "Global liquidity, money growth and UK inflation," Working Paper series 21_14, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:21_14
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    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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