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The Recent Rise in US Inflation: Policy Lessons from the Quantity Theory

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  • Han Gao
  • Juan Pablo Nicolini

Abstract

We build a scenario for inflation in the United States in the years to come. Following Gao, Kulish, and Nicolini (2021), we use the quantity theory of money as a conceptual framework and confront the theory with evidence from both the United States and other OECD countries. We argue that a) the quantity theory of money works very well in the medium term, which we define to be close to four years; b) deviations from the inflation rate predicted by the quantity theory tend to disappear in the medium term; c) the burst in inflation that started in 2012 in the United States is a deviation from the inflation rate predicted by the quantity theory; and d) if the policy framework does not change, we expect inflation to be back close to its 2% target no later than 2025.

Suggested Citation

  • Han Gao & Juan Pablo Nicolini, 2023. "The Recent Rise in US Inflation: Policy Lessons from the Quantity Theory," Staff Report 650, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:96701
    DOI: 10.21034/sr.650
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    References listed on IDEAS

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    1. Milton Friedman, 1959. "The Demand for Money: Some Theoretical and Empirical Results," NBER Chapters, in: The Demand for Money: Some Theoretical and Empirical Results, pages 1-29, National Bureau of Economic Research, Inc.
    2. Fernando Alvarez & Andrew Atkeson & Chris Edmond, 2009. "Sluggish Responses of Prices and Inflation to Monetary Shocks in an Inventory Model of Money Demand," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(3), pages 911-967.
    3. Adao, Bernardino & Correia, Isabel & Teles, Pedro, 2009. "On the relevance of exchange rate regimes for stabilization policy," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1468-1488, July.
    4. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 66(4), pages 545-556.
    5. Stephanie Schmitt-Grohé & Martín Uribe, 2016. "Downward Nominal Wage Rigidity, Currency Pegs, and Involuntary Unemployment," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1466-1514.
    6. Martín Uribe, 2022. "The Neo-Fisher Effect: Econometric Evidence from Empirical and Optimizing Models," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(3), pages 133-162, July.
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    More about this item

    Keywords

    Quantity theory of money; Inflation; Monetary policy;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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