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Money and the Great Disinflation

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Author Info

  • Samuel Reynard

Abstract

Using U.S. and euro area data, this paper presents a significant and proportional relationship between money growth and subsequent inflation when accounting for equilibrium velocity movements due to inflation regimes changes. These movements, driven by money demand adjustments to low-frequency Fisherian interest rate variations, are derived from consistent U.S. and euro area money demand specifications - after contradictory coexisting results are explained. Not accounting for equilibrium velocity and interest rate movements biases cross-country and time series dynamic money growth / inflation estimated relationships, and leads to the non-proportional, non-significant, and reverse causality results found in studies that include the post-1980 period.

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File URL: http://www.snb.ch/n/mmr/reference/working_paper_2006_07/source/working_paper_2006_07.n.pdf
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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2006-07.

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Length: 59 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:snb:snbwpa:2006-07

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Related research

Keywords: money growth; inflation; equilibrium velocity; quantity theory; money demand;

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References

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  1. Warne, Anders & Bruggeman, Annick & Donati, Paola, 2003. "Is the demand for euro area M3 stable?," Working Paper Series 0255, European Central Bank.
  2. John B. Carlson & Dennis L. Hoffman & Benjamin D. Keen & Robert H. Rasche, 1999. "Results of a study of the stability of cointegrating relations comprised of broad monetary aggregates," Working Paper 9917, Federal Reserve Bank of Cleveland.
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Citations

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Cited by:
  1. Oleg Kitov & Ivan Kitov, 2011. "Inflation and unemployment in Switzerland: from 1970 to 2050," Papers 1102.5405, arXiv.org.
  2. Edward Nelson, 2008. "Why Money Growth Determines Inflation in the Long Run: Answering the Woodford Critique," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1791-1814, December.
  3. Ceri Davies & Max Gillman & Michal Kejak, 2012. "Deriving the Taylor Principle when the Central Bank Supplies Money," IEHAS Discussion Papers 1225, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  4. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2008. "Interpreting euro area inflation at high and low frequencies," European Economic Review, Elsevier, vol. 52(6), pages 964-986, August.
  5. Katrin Assenmacher-Wesche & Stefan Gerlach, 2006. "Money Growth, Output Gaps and Inflation at Low and High Frequency: Spectral Estimates for Switzerland," Working Papers 2006-05, Swiss National Bank.
  6. Reynard, Samuel, 2007. "Maintaining low inflation: Money, interest rates, and policy stance," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1441-1471, July.
  7. Christiaan Pattipeilohy, 2013. "A descriptive analysis of the balance sheet and monetary policy of De Nederlandsche Bank: 1900-1998 and beyond," DNB Occasional Studies 1103, Netherlands Central Bank, Research Department.
  8. Petra Gerlach-Kristen, 2006. "A Two-Pillar Phillips Curve for Switzerland," Working Papers 2006-09, Swiss National Bank.
  9. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2006. "Money at Low Frequencies," CEPR Discussion Papers 5868, C.E.P.R. Discussion Papers.
  10. Faugere, Christophe, 2010. "Macrofoundations for A (Near) 2% Inflation Target," MPRA Paper 23491, University Library of Munich, Germany, revised 25 Jun 2010.
  11. Adalid, Ramón & Detken, Carsten, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 0732, European Central Bank.
  12. Samuel Reynard, 2012. "Assessing Potential Inflation Consequences of QE after Financial Crises," Working Paper Series WP12-22, Peterson Institute for International Economics.

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