Money Growth and Inflation: International Historical Evidence on High Inflation Episodes for Developed Countries

31 Pages Posted: 14 Jan 2019

See all articles by Marco Gallegati

Marco Gallegati

Università Politecnica delle Marche - Faculty of Economics

Federico Giri

Università Politecnica delle Marche

Michele U. Fratianni

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Universita' Politecnica delle Marche

Date Written: January 9, 2019

Abstract

How long is the long run in the relationship between money growth and inflation? How important are high inflation episodes for the unit slope finding in the quantity theory of money? To answer these questions we study the relationship between excess money growth and inflation over time and across frequencies using annual data from 1871 to 2013 for several developed countries. Wavelet-based exploratory analysis shows the existence of a close stable relationship between excess money growth and inflation only over longer time horizons, i.e. periods greater than 16 and 24 years, with money growth mostly leading. When we investigate the sensitivity of the unit slope finding to inflation episodes using a scale-based panel data approach we find that low-frequency regression coefficients estimated over variable-length subsamples before and after WWII are largely affected by high inflation episodes. Taken together the results that inflationary upsurges affect regression coefficients but not the closeness of the long-run relationship call for a qualification of the Quantity Theory of Money and suggests that policymakers should not lose interest on monetary developments.

Keywords: Quantity theory of money, Time-frequency analysis, Low frequency relationships, High inflation episodes

JEL Classification: C22, E40, E50, N10

Suggested Citation

Gallegati, Marco and Giri, Federico and Fratianni, Michele, Money Growth and Inflation: International Historical Evidence on High Inflation Episodes for Developed Countries (January 9, 2019). Bank of Finland Research Discussion Paper No. 1/2019. Available at SSRN: https://ssrn.com/abstract=3314554

Marco Gallegati (Contact Author)

Università Politecnica delle Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy

Federico Giri

Università Politecnica delle Marche ( email )

Piazzale Martelli 8
Ancona, 18039
Italy

Michele Fratianni

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-855-3360 (Phone)
812-855-3354 (Fax)

Universita' Politecnica delle Marche ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
39-071-2207120 (Phone)

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