Inflation and Monetary Dynamics in the Us: a Quantity-Theory Approach

Posted: 18 Oct 2005

See all articles by Fabio C. Bagliano

Fabio C. Bagliano

University of Turin - Department of Economics and Statistics; Center for Research on Pensions and Welfare Policies (CeRP); University of Turin - Collegio Carlo Alberto

Claudio Morana

Università di Milano Bicocca; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES); Center for Economic Research on Pensions and Welfare Policies (CeRP); Rimini Center for Economic Analysis - Europe ETS; Rimini Center for Economic Analysis - HQ

Abstract

In this paper we investigate the long-run link between inflation and money growth in the US since 1960. A measure of the long-run inflation trend is constructed, which bears the interpretation 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. Consistently 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 two- to three-year horizon, yielding valuable information to monetary policymakers.

Keywords: Inflation, money growth, quantity theory, long memory, fractional cointegration

JEL Classification: C22, E31, E52

Suggested Citation

Bagliano, Fabio C. and Morana, Claudio, Inflation and Monetary Dynamics in the Us: a Quantity-Theory Approach. Applied Economics, Vol. 39, pp. 229-244, 2007, Available at SSRN: https://ssrn.com/abstract=601001

Fabio C. Bagliano (Contact Author)

University of Turin - Department of Economics and Statistics ( email )

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University of Turin - Collegio Carlo Alberto ( email )

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Claudio Morana

Università di Milano Bicocca ( email )

Dip Economia Metodi Quantitativi Strategie Impresa
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Università degli Studi di Milano-Bicocca - Center for European Studies (CefES) ( email )

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Milano, 20126
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Center for Economic Research on Pensions and Welfare Policies (CeRP) ( email )

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Italy

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