Thursday, May 26, 2011

Inflation, Money Growth, and GDP Growth

From McCandless and Weber's "Some Monetary Facts" (Federal Reserve Bank of Minneapolis Quarterly Review, 1995), as brought to popular attention by Robert Lucas's 1995 Nobel Prize Lecture, Corrections displays the relationship between money growth, inflation, and real GDP growth.  

The figures display 30-year differences across 110 countries between 1960 and 1990.  

Money growth and inflation have a nearly one-to-one relationship (click to enlarge).
 Money growth and real GDP growth have a nearly zero-correlation relationship (click to enlarge).
Rule of thumb #1: In the long run, inflation is always and everywhere a monetary phenomenon.  
Rule of thumb #2: Money is neutral in the long run.  

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