Joseba Madariaga:Let's talk about inflation: My professional view as Macroeconomics Professor
Update: 2024-12-16
Description
https://www.linkedin.com/pulse/lets-talk-inflation-my-profesional/ Milton Friedman, Nobel laureate in economics in 1976, pointed out that "inflation is always and everywhere a monetary phenomenon". Through the quantity theory of money, it can be accepted that the growth of the quantity of money is the main determinant of inflation. This relationship works well in the long run and less so in the short run. That is, the month-to-month movements of the quantity of money and inflation are not clearly related. This can be seen in the two figures I present. The first shows the quarterly evolution of the annual growth rates of the CPI and the monetary aggregate M3 from 2007 to 2023. In the second, we see the relationship between the two considering different lags. The conclusions are threefold:
1.- There is no relationship between the contemporaneous growth rates of the two series (correlation 0.14).
2.- M3 has NO relationship with past inflation (the correlation coefficients are not statistically significant).
3.- Inflation DOES have a statistically significant relationship with past changes in the monetary aggregate. Specifically, the relationship is positive, and the maximum value (correlation of 0.31) occurs with a lag of seven quarters. In other words, what happens today with inflation is positively related to what happened seven quarters ago with M3. Recall that in 2021 we were in the midst of expansionary monetary policy ... now we have inflation.
1.- There is no relationship between the contemporaneous growth rates of the two series (correlation 0.14).
2.- M3 has NO relationship with past inflation (the correlation coefficients are not statistically significant).
3.- Inflation DOES have a statistically significant relationship with past changes in the monetary aggregate. Specifically, the relationship is positive, and the maximum value (correlation of 0.31) occurs with a lag of seven quarters. In other words, what happens today with inflation is positively related to what happened seven quarters ago with M3. Recall that in 2021 we were in the midst of expansionary monetary policy ... now we have inflation.
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