Last week the Financial Times published a letter with the title ‘Lurches in money sup­ply are proven British menace’. The signatories (including our Director, Dr Juan Castaneda) warn that the amount of money broadly defined in the UK contracted by -4.2% in the year to September, the largest fall ever recorded. You can access the letter here.

Our director, Dr Juan Castaneda, has co-authored an article on ‘Money Growth, Money Velocity and Inflation in the US, 1948–2021’ with Dr Jose Luis Cendejas, published in Open Economies Review. Full text access here.

The paper is titled: Revisiting the Quantity Theory of Money: Money Growth, Money Velocity and Inflation in the US, 1948-2021

Abstract:

Leading central banks did not anticipate the surge in inflation in 2021 and 2022. In our paper we assess whether changes in the velocity of money and monetary growth (broadly-defined)explain long term inflation patterns in the US .We use a hundred-year sample to study the long term and the cyclical behaviour of money velocity. We find that changes in the velocity of money are short lived, and revert to its mean. We also characterise the periods where changes in money velocity have kept closer to its mean as those of monetary equilibrium. We use a regime switching model to test for the impact of changes in the amount of money (broadly defined) and in money velocity in inflation over the medium and long term. Our model explains both the non-inflationary outcome of the Global Financial Crisis and the surge in inflation in the aftermath of Covid-19 pandemic

Download:

Download the paper here

The working paper series can be found here