Money Growth and the Post-Pandemic Surge in Inflation

Claudio BORIO * Head of the Monetary and Economic Department, Bank of International Settlements (BIS). Contact: claudio.borio@bis.org.

Boris HOFMANN ** Head of Monetary Policy, Monetary and Economic Department, Bank of International Settlements (BIS). Contact: boris.hofmann@bis.org.

Egon ZAKRAJŠEK *** Executive Vice President and Director of Research, Federal Reserve Bank of Boston. Contact: egon.zakrajsek@bos.frb.org.The authors thank Charles Goodhart, Otmar Issing, David Laidler, Francesco Papadia and Hyun Shin for comments on an earlier version of this paper. The views expressed are those of the authors and not necessarily the views of the BIS, the Federal Reserve Bank of Boston, the principals of the Board of Governors or the Federal Reserve System. The authors are grateful to Alexis Maurin for excellent analysis and research assistance.

The strength of the link between money growth and inflation depends on the inflation regime: it is one-to-one when inflation is high and virtually non-existent when it is low. A link was also clearly visible in the risk of moving from a low to a high-inflation regime in the aftermath of the pandemic. A surge in money growth preceded the inflation flare-up in 2021-2022, as countries with stronger money growth saw markedly higher inflation. Moreover, keeping an eye on money growth would have helped to improve inflation forecasts. The disinflation that began in most countries in mid-2022 was also preceded by a marked decline in money growth. However, over this second sub-period, the cross-country link between money growth and inflation is visible only if countries with very high inflation rates are included in the sample. All this indicates that money growth does convey information about inflation, but that it cannot be easily used in a reliable way.

Does money growth help to explain the post-pandemic surge in inflation? Monetary aggregates have gradually lost relevance since the heyday of monetary targeting in the 1970s and 1980s as their link with inflation has weakened considerably. Consequently, they largely disappeared from academic analysis (Laidler, 2002), as well as from monetary policy design and implementation. More recently, however, they have enjoyed a certain revival, as the surprising resurgence of inflation in the aftermath of the pandemic went hand in hand with increases in the money stock in a number of jurisdictions prominent in economic debates (Goodhart, 2021; Issing, 2021a; King, 2021; Laidler, 2021; Congdon, 2022)1 as well as more generally.Figures 1 (below) illustrate the comovement of broad money growth and inflation for several jurisdictions. They show that…