Money and Inflation: Where do we Stand?

Jose De Gregorio (1)
(1) , Chile

Abstract

This article analyzes the rapid growth of money (M1A) in the Chilean economy, that has coincided with low inflation and a loosened monetary policy. This has been advocated to assert that such monetary growth is inconsistent with the inflation target. This work is intended to prove such an argument wrong. First, episodes occurred in other lower-inflation countries are presented, where monetary aggregates have grown even faster than in Chile, without resulting in higher inflation. Second, money trends are shown to be consistent with money demand estimates, although these are very volatile. Finally, the paper explains why in the context of a monetary policy based on inflation targeting, where the policy instrument is the interest rate, it is possible for money to fluctuate widely without jeopardizing the inflation target. Even if inflation is associated to an excessive increase in the amount of money, and monetary policy is neutral over the long term, monetary aggregates provide little information on inflationary pressures.

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Authors

Jose De Gregorio
Gregorio , J. D. . (2003). Money and Inflation: Where do we Stand?. ECONOMÍA CHILENA, 6(1), 5–19. https://doi.org/10.36923/economa.v6i1.56

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