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Money and Inflation: Where do we Stand?

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  • Jose de Gregorio R.

Abstract

This article analyzes the rapid growth of money (M1A) in the Chilean economy, that has coincided with low inflation and a loosened monetary policy. This has been advocated to assert that such monetary growth is inconsistent with the inflation target. This work is intended to prove such an argument wrong. First, episodes occurred in other lower-inflation countries are presented, where monetary aggregates have grown even faster than in Chile, without resulting in higher inflation. Second, money trends are shown to be consistent with money demand estimates, although these are very volatile. Finally, the paper explains why in the context of a monetary policy based on inflation targeting, where the policy instrument is the interest rate, it is possible for money to fluctuate widely without jeopardizing the inflation target. Even if inflation is associated to an excessive increase in the amount of money, and monetary policy is neutral over the long term, monetary aggregates provide little information on inflationary pressures.

Suggested Citation

  • Jose de Gregorio R., 2003. "Money and Inflation: Where do we Stand?," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 6(1), pages 5-19, April.
  • Handle: RePEc:chb:bcchec:v:6:y:2003:i:1:p:5-19
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    1. Gerlach, Stefan & Svensson, Lars E. O., 2003. "Money and inflation in the euro area: A case for monetary indicators?," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1649-1672, November.
    2. Paul De Grauwe & Magdalena Polan, 2005. "Is Inflation Always and Everywhere a Monetary Phenomenon?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(2), pages 239-259, June.
    3. W A Razzak, 2001. "Money in the era of inflation targeting," Reserve Bank of New Zealand Discussion Paper Series DP2001/02, Reserve Bank of New Zealand.
    4. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
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