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Inflation and monetary dynamics in the US: a Quantity-Theory Approach


Morana, Claudio; Bagliano, Fabio


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Abstract In this paper we investigate the long-run link between inflation and money growth in the US since 1960. A measure of the long-run inflation trend is constructed, which bears the interpreation of "monetary" inflation rate and is directly related to the excess nominal money growth process (money growth less output growth) as postulated by the quantity theory. Consistent with the memory characteristics of the series, their fractional integration and cointegration properties are taken into account in empirical modelling. The proposed measure is then compared with several existing measures of "core inflation'', aimed at capturing long-run inflation dynamics but unrelated to money growth. The "monetary'' long-run inflation rate performs well in out-of-sample forecasting exercises especially over a two- to three-year horizon, yielding valuable information to monetary policymakers.
Publikationsjahr 2006
Seitenangabe S. 229-244
Zeitschriftentitel Applied Economics, 39 (2006) 2
DOI http://dx.doi.org/10.1080/00036840500428047
Status Postprint; begutachtet (peer reviewed)
Lizenz PEER Licence Agreement (applicable only to documents from PEER project)