Money, Inflation and Casuality (Another Look at the Empirical Evidence for the USA, 1953–84)

Abstract

This paper addresses the issue of the existence of a causal relationship between inflation (i.e. change in the price level) and change in the money supply. Three different causality tests are discussed and implemented for two separate time periods. The results are mixed and somewhat difficult to interpret on intuitive grounds. While a causal relationship is found to exist between changes in the consumer price index and changes in the narrowly defined money supply, there is no relationship indentifiable between the other price and money supply data series used. Given this result, one can see why different results are frequently obtained the different researchers focusing on the question of a relationship between the supply of money and prices. Finally, the results of a previous paper by Feige and Pearce are called into question as the result of a serious misspecification.

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