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A Note of Caution on the Relation Between Money Growth and Inflation

Author

Listed:
  • Mr. Helge Berger
  • Sune Karlsson
  • Pär Österholm

Abstract

We assess the bivariate relation between money growth and inflation in the euro area and the United States using hybrid time-varying parameter Bayesian VAR models. Model selection based on marginal likelihoods suggests that the relation is statistically unstable across time in both regions. The effect of money growth on inflation weakened notably after the 1980s before strengthening after 2020. There is evidence that this time variation is related to the pace of price changes, as we find that the maximum impact of money growth on inflation is increasing in the trend level of inflation. These results caution against asserting a simple, time-invariant relationship when modeling the joint dynamics of monetary aggregates and consumer prices.

Suggested Citation

  • Mr. Helge Berger & Sune Karlsson & Pär Österholm, 2023. "A Note of Caution on the Relation Between Money Growth and Inflation," IMF Working Papers 2023/137, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/137
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    Cited by:

    1. Rodney Edvinsson & Sune Karlsson & Pär Österholm, 2025. "Does money growth predict inflation in Sweden? Evidence from vector autoregressions using four centuries of data," Empirical Economics, Springer, vol. 68(4), pages 1613-1635, April.
    2. Ali Zeb & Niu Shuhai & Obaid Ullah, 2024. "Inflationary dynamics under fiscal and monetary asymmetries: a nonlinear investigation in Pakistan," SN Business & Economics, Springer, vol. 4(12), pages 1-30, December.
    3. Anil Ari & Carlos Mulas-Granados & Victor Mylonas & Lev Ratnovski & Wei Zhao, 2026. "One Hundred Inflation Shocks: Seven Stylized Facts," International Journal of Central Banking, International Journal of Central Banking, vol. 22(1), pages 391-548, January.

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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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