The Relationship Between Money Growth and Inflation

This paper investigates the relationship between money supply growth and inflation. Using money supply growth, real GDP growth, and inflation rate data across a sample of 31 countries, I test the implications of the quantity theory between the years 1979 to 2018. Across the whole sample, the quantity theory explains almost all the variation in inflation rates between countries. The regression model fits the data much better in the first half of the sample years compared to the second half. I find that the breakdown of the model can be explained in part by the effect from a country at the zero lower bound of nominal interest rates. At the lower bound of interest, a country’s money growth has a significantly weaker effect on inflation