Does money growth help explain the recent inflation surge?
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Key takeaways
- The strength of the link between money growth and inflation depends on the inflation regime: it is one-to-one when inflation is high and virtually non-existent when it is low.
- A link can also be seen in the recent possible transition from a low- to a high-inflation regime. An upsurge in money growth preceded the inflation flare-up, and countries with stronger money growth saw markedly higher inflation.
- Looking at money growth would have helped to improve post-pandemic inflation forecasts, suggesting that its information value may have been neglected.
Does money growth help to explain the post-pandemic surge in inflation? Monetary aggregates have gradually lost relevance since the heyday of monetary targeting in the 1970s and 1980s as their link with inflation has weakened considerably.
Consequently, they have largely disappeared from academic analysis (Laidler (2002)), as well as from monetary policy design and implementation. More recently, however, they have enjoyed a certain revival, as the surprising resurgence of inflation has gone hand in hand with increases in the money stock in a number of jurisdictions prominent in economic debates (Congdon (2022), Issing (2021a), Laidler (2021), Goodhart (2021), King (2021))1 as well as more generally (Graph 1). In this Bulletin, we provide some systematic cross-country evidence on the link between monetary aggregates and inflation. While the focus is on the current inflation flare-up, we also offer some longerterm evidence for context. Our aim, of course, cannot be to settle a debate that has raged in the profession since the 1950s; not least, we are concerned here only with the signalling value of monetary aggregates for inflation, not with the direction of causation. Rather, the goal is to provide a more solid basis for understanding the current and still unfolding episode of inflation.
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