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

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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.
Publication Year 2006
Page/Pages p. 229-244
Journal Applied Economics, 39 (2006) 2
Status Postprint; reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)