Inflation and Money Growth: Evidence from a Multi-Country Data-Set

Using a multi-country dataset extracted from the International Monetary Fund IFS database, I find a strong correlation between average growth rates of various monetary aggregates and average inflation. The correlations remain strong when countries with higher average inflation rates are removed from the sample. My results confirm the strong correlations found in the literature and in particular in McCandless and Weber (1995). However they contradict those in De Grauwe and Polan (2001) who, in a similar analysis, find that the strong link is almost wholly due to the presence of high or hyperinflation countries in the sample. They find that the relationship between inflation and money growth for low inflation countries (on average less than $10%$ per annum over the last 40 years) is weak. In this study strong correlations are found even if such countries are removed from my sample. The findings in this study are confirmed by two further analyses of the relationship between money growth and inflation in each individual country included in my sample. The first analysis shows that within two years almost all countries show a significant pass-through of monetary shocks to inflation. The second analysis estimates significant long run relationships between inflation and excess money creation in each country. The signi ficance of these results is not dependent on the level of inflation in the individual countries. The results confirm the importance of a monetary analysis in a monetary policy strategy