Sunday, September 11, 2011

"no clear relationship"

Notes from the Money Growth and Inflation PDF:

To investigate the length of the long run, an analysis was conducted that compares the relationship between money growth and inflation over eight-, four-, and two-year periods in the United States since 1959. The findings depend greatly on the monetary aggregate used to measure money growth. Broader definitions of money, namely the M2 and M3 monetary aggregates, provide results that suggest a relatively close relationship between money and inflation over a “long run” as short as four years. However, results using narrower definitions of money, namely M1 and the monetary base, show no clear relationship over any of these time horizons.

The difference between "narrow" money and "broad" money is that broad money has more debt in it. Near-money, they call it.

The clear relation between money and prices is not a relation to government money, but to near-money, or debt.

Data since 1959 are used for the analysis. While data are available much farther back in time, the relationship between money growth and inflation was quite different in earlier years.

See? The relationship was different. Quite different, in fact. So then it is not always true that there is a relationship between money and prices -- even for M2 and M3 money.

Come to think of it, there was less debt in the money in those days.

Perhaps the most important qualification is that the finding of a close long-run relationship is not consistent across various definitions of money. Recall that the monetary aggregate M2 was used in the previous analysis. When the analysis is repeated using M3, a broader definition of money, the results are similar to those reported for M2. However, when narrower definitions of money are used, namely M1 and the monetary base, the results are quite different. In particular, there is no clear relationship between money growth and inflation, even for eight-year averages.

No relation between the money base and inflation. No relation even between M1 and inflation. Only when the broader definitions of money are used, definitions that include savings for crying out loud, only then does Fitzgerald observe a link between money growth and inflation. And this is after he has worked prices in to his numbers.


Jazzbumpa said...
This comment has been removed by the author.
Jazzbumpa said...

(Typos corrected)

If inflation is dollars chasing goods, then the relationship to the money measure type is exactly backwards. Base money and M1 are basically money in circulation, and therefore involved in the chase. The higher numbered aggregates include less and less active money. How can those dollars be involved in goods-chasing, and therefore in inflation?

I'm beginning to think that nobody has any understanding of inflation.

Clonal said...


Did you look at my M2 graphs. High negative correlations between changes in CPI and changes in M2.

Thus increases in the money supply appear to moderate CPI increases.

Friedman did not have a clue. The same mistake being repeated over and over again.

The Arthurian said...

Jazz, your MZM is very close in size to M2 money, and -- being of zero maturity -- can be withdrawn (and spent) with no waiting period. It includes "checkable deposits" and savings deposits but not time deposits, according to wikipedia.

So there could have been some magical transformation by which MZM serves the purpose that M2 is said to serve with regard to inflation. But, Clonal, your negative correlation numbers would probably be about the same for MZM as for M2.

Anyway, I'd like to see turnover numbers for MZM, compared to M1 and M2. To see whether MZM actually IS being spent, or if it is more like M2, mostly saved.

Clonal said...

MZM is even more negatively correlated

1960-2011 r = -0.24
1960-1970 r = -0.78
1971-1983 r = -0.66
1984-2011 r = -0.23

Clonal said...

The strong negative correlations between changes in MZM and M2 and changes in CPI, particularly before 1984 lead me to believe that higher inflation leads to lower savings, and vice versa. After 1984, that relationship would have weakened because of increasing household debt obligations (too much debt!)

Jazzbumpa said...

Clonal -

Yeah, I saw that. Pretty striking.

Friedman wasn't stupid, though. There has to be some reason why he connected inflation to money supply. I wonder what his agenda was?!?

Art -

It ain't my MZM - never heard of it until Beckworth said he prefers it to M1.


Clonal said...

For M1, the correlations are

1960-2011 r = 0.074
1960-1970 r = 0.52
1971-1983 r = -0.40
1984-2011 r = -0.27

For M2, the correlations are

1960-2011 r = 0.17
1960-1970 r = -0.38
1971-1983 r = -0.76
1984-2011 r = -0.20