Forecasting Inflation (And The Business Cycle?) With Monetary Aggregates

Date Added: Nov 2010
Format: PDF

The authors show how monetary aggregates can be usefully incorporated in forecasts of inflation. This requires fully disregarding the high-frequency fluctuations blurring the money/inflation relation, i.e., the projection of inflation onto monetary aggregates must be restricted to the low frequencies. Using the same tools, they show that money growth has (little) predictive power over output at business cycle frequencies. Although few would disagree that "Inflation is always and everywhere a monetary phenomenon" (Friedman 1963), the last decades have seen a diminished role assigned to money in the conduct and modelling of monetary policy.