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Broad Money Growth and Inflation in the United States

Author

Listed:
  • Liam P. Ebrill

    (International Monetary Fund)

  • Steven M. Fries

    (International Monetary Fund)

Abstract

A U.S. inflation-forecasting model recently developed by the Federal Reserve--the so-called P* relationship--is analyzed. An innovation in that model is the significance of M2 velocity in predicting changes in inflation. However, this paper's empirical analysis indicates that an inflation equation in levels, rather than first differences, is more appropriate and reveals that the significance of M2 velocity is not robust to this alternative specification. Although there is a long-run relationship between M2 and the price level, the output gap in a Phillips curve model captures much of the short-run deviations from this relationship.

Suggested Citation

  • Liam P. Ebrill & Steven M. Fries, 1991. "Broad Money Growth and Inflation in the United States," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 736-750, December.
    • Handle: RePEc:pal:imfstp:v:38:y:1991:i:4:p:736-750
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    Citations

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    Cited by:

    1. Lillian Kamal, 2014. "Do GAP Models Still have a Role to Play in Forecasting Inflation?," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 8(3), pages 1-12.
    2. J.M. Groeneveld & K.G. Koedijk & C.J.M. Kool, 1997. "Money, prices and the transition to EMU," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 50(203), pages 481-504.
    3. Joseph Atta-Mensah, 1996. "A Modified P*-Model of Inflation Based on M1," Staff Working Papers 96-15, Bank of Canada.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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