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Time Aggregation and the Relationship between Inflation and Money Growth
Author(s) -
BREUER JANICE BOUCHER,
MCDERMOTT JOHN,
WEBER WARREN E.
Publication year - 2018
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12463
Subject(s) - economics , inflation (cosmology) , monetary economics , panel data , monetary policy , positive relationship , econometrics , macroeconomics , psychology , social psychology , physics , theoretical physics
Using panel data for 99 countries, we confirm that the measured elasticity of prices with respect to money is higher, and closer to unity, the higher is money growth and the longer the time horizon over which the data are averaged. We propose two explanations. In one, the true model of inflation involves a lagged response to money growth. In the other, there is negative correlation between shocks to inflation and money growth. Our empirical results can be explained if high–money‐growth countries have (i) shorter lags or (ii) less negative correlation, when compared to countries with low money growth.