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Broad Divisia Money, Supply Pressures, and U.S. Inflation Following the COVID-19 Recession

Author

Listed:
  • Michael D. Bordo
  • John V. Duca
  • Barry E. Jones

Abstract

The rise of U.S. inflation in 2021 and 2022 and its partial subsiding have sparked debates about the relative role of supply and demand factors. The initial surge surprised many macroeconomists despite the unprecedented jump in money growth in 2020-21. We find that the relationship between consumption and the theoretically based Divisia M3 measure of money (velocity) can be well modeled both in the short- and long-runs. We use the estimated long-run relationship to calculate the deviation of actual velocity from its long-run equilibrium and incorporate it into a P-Star framework. Our model of velocity significantly improves the performance of the P-Star model relative to using a one-sided HP filter to calculate trend velocity as, for example, used by Belongia and Ireland (2015, 2017). We also include a global supply pressures index in the model and find that recent movements in U.S. inflation largely owed to aggregate demand driven macroeconomic factors that are tracked by Divisia money with a smaller role played by supply factors.

Suggested Citation

  • Michael D. Bordo & John V. Duca & Barry E. Jones, 2025. "Broad Divisia Money, Supply Pressures, and U.S. Inflation Following the COVID-19 Recession," NBER Working Papers 34017, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34017
    Note: ME
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    More about this item

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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