Scandinavian Working Papers in Economics

Working Papers,
Örebro University, School of Business

No 2023:9: A Note of Caution on the Relation between Money Growth and Inflation

Helge Berger (), Sune Karlsson () and Pär Österholm ()
Additional contact information
Helge Berger: International Monetary Fund, Postal: International Monetary Fund, 700 19th Street NW, Washington, DC 20431, USA
Sune Karlsson: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden
Pär Österholm: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden

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 that shocks to money growth has on inflation weakened notably after the 1980s before making a comeback after 2020. This instability implies that caution should be exercised when relating monetary aggregates to inflation.

Keywords: Bayesian VAR; Time-varying parameters; Stochastic volatility; Model selection

JEL-codes: E31; E37; E47; E51

Language: English

11 pages, April 28, 2023

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