Inflation and the growth rate of money in the long run and the short run

Abstract

Between 1960 and 2013, in the United States the inflation rate was essentially proportional to the growth rate of money in the long run, but that relationship did not hold in the short run. We ask whether three standard monetary model economies from the Cash-in-Advance, the New-Keynesian, and the Search-Money frameworks replicate these two facts. We find that all three deliver the first fact, but that they fail to deliver the second fact, since in all three of them the inflation rate is proportional to the growth rate of money both in the long run and in the short run. This is because in all three model economies the price level responds too quickly to changes in the growth rate of money.