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Inflation and monetary dynamics in the USA: a quantity-theory approach

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  • Claudio Morana
  • Fabio Cesare Bagliano

Abstract

In this article we investigate the long-run link between inflation and money growth in the United States 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 2-3-year horizon, yielding valuable information to monetary policymakers.

Suggested Citation

  • Claudio Morana & Fabio Cesare Bagliano, 2007. "Inflation and monetary dynamics in the USA: a quantity-theory approach," Applied Economics, Taylor & Francis Journals, vol. 39(2), pages 229-244.
    • Handle: RePEc:taf:applec:v:39:y:2007:i:2:p:229-244
    DOI: 10.1080/00036840500428047
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    Cited by:

    1. Bagliano, Fabio C. & Morana, Claudio, 2009. "International macroeconomic dynamics: A factor vector autoregressive approach," Economic Modelling, Elsevier, vol. 26(2), pages 432-444, March.
    2. Fabio Bagliano & Claudio Morana, 2010. "Business cycle comovement in the G-7: common shocks or common transmission mechanisms?," Applied Economics, Taylor & Francis Journals, vol. 42(18), pages 2327-2345.
    3. Giuseppe Ferrero & Andrea Nobili & Patrizia Passiglia, 2011. "Assessing excess liquidity in the euro area: the role of sectoral distribution of money," Applied Economics, Taylor & Francis Journals, vol. 43(23), pages 3213-3230.
    4. Richard T. Baille & Claudio Morana, 2009. "Investigating Inflation Dynamics and Structural Change with an Adaptive ARFIMA Approach," ICER Working Papers - Applied Mathematics Series 06-2009, ICER - International Centre for Economic Research.
    5. Baillie, Richard T. & Morana, Claudio, 2012. "Adaptive ARFIMA models with applications to inflation," Economic Modelling, Elsevier, vol. 29(6), pages 2451-2459.
    6. David Bywaters & David Thomas, 2011. "Real money demand and supply meets Federal debt," Applied Economics Letters, Taylor & Francis Journals, vol. 18(12), pages 1189-1193.
    7. Mohammad Mirbagherijam, 2014. "Survey the Dynamic of Inflation in Iran Since 1990," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 4(6), pages 210-224, June.
    8. Belkhouja, Mustapha & Mootamri, Imene, 2016. "Long memory and structural change in the G7 inflation dynamics," Economic Modelling, Elsevier, vol. 54(C), pages 450-462.

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