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Is the Quantity Theory of Money Useful in Forecasting U.S. Inflation?

Author

Listed:
  • Markku Lanne

    (University of Helsinki and CREATES)

  • Jani Luoto

    (University of Helsinki)

  • Henri Nyberg

    (University of Helsinki)

Abstract

We propose a new simple model incorporating the implication of the quantity theory of money that money growth and inflation should move one for one in the long run, and, hence, inflation should be predictable by money growth. The model fits postwar U.S. data well, and beats common univariate benchmark models in forecasting inflation. Moreover, this evidence is quite robust, and predictability is found also in the Great moderation period. The detected predictability of inflation by money growth lends support to the quantity theory.

Suggested Citation

  • Markku Lanne & Jani Luoto & Henri Nyberg, 2014. "Is the Quantity Theory of Money Useful in Forecasting U.S. Inflation?," CREATES Research Papers 2014-26, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2014-26
    as

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    File URL: https://repec.econ.au.dk/repec/creates/rp/14/rp14_26.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Money growth; transfer function model; low-pass filter;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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