Title: Money/Asset Ratio as a Predictor of Inflation
Abstract: This paper modifies a quantity theory of money to forecast inflation including liquid assets such as government bonds to measure money demand for asset transaction. The out-of-sample forecast results show that, at least since the early 1990s, money supply/government debt ratio has been a useful predictor of U.S. inflation over one- to three-year horizons. In using real-time vintage data, I find that, since 2000Q1, forecasts that derived from the money/asset model have slightly improved upon those from the Greenbook in forecasting quarter-over-quarter CPI inflation at short horizons, from two- to four-quarter. These results imply that using this ratio the Federal Reserve can not only forecast, but also control inflation rate coordinating monetary policy with fiscal policy. Money supply/government debt ratio can also explain the U.S. inflation dynamics since the early 1960s. It argues that a low inflation in recent decades is due to high government debt relative to money supply.
Publication Year: 2020
Publication Date: 2020-01-01
Language: en
Type: article
Indexed In: ['crossref']
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