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The Lag from Monetary Policy Actions to Inflation: Friedman Revisited

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Listed author(s):
  • Nicoletta Batini
  • Edward Nelson

Abstract

This paper updates and extends Friedman’s (1972) evidence on the lag between monetary policy actions and the response of inflation. Our evidence is based on UK and US data for the period 1953–2001 on money growth rates, inflation, and interest rates, as well as annual data on money growth and inflation. We reaffirm Friedman’s result that it takes over a year before monetary policy actions have their peak effect on inflation. This result has persisted despite numerous changes in monetary policy arrangements in both countries. Similarly, advances in information processing and in financial market sophistication do not appear to have substantially shortened the lag. The empirical evaluation of dynamic general equilibrium models needs to be extended to include an assessment of these models’ ability to account for the monetary transmission lags found in the data.

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Paper provided by Monetary Policy Committee Unit, Bank of England in its series Discussion Papers with number 06.

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Date of creation: 2001
Handle: RePEc:mpc:wpaper:06
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