Excess money creation, inflation, and money market equilibrium.

摘要

Observed changes in monetary aggregates can be said to result from changes in the supply of and/or demand for money. A consequence of this view is the assertion that observed changes in quantities alone are not sufficient to determine whether or not said changes are per se inflationary or deflationary. Knowledge of whether or not the change in quantity was brought about by a shift in the supply of or demand for money is crucial to anticipating the effects of quantity changes on prices.; This research adheres to the transactions view of money demand; i.e. that changes in real income or in the incentives to produce constitute scale variables that shift the money demand curve. Money in this sense is the narrow transactions measure known as M1. It is assumed that the demand for money obeys the law of demand and is downward sloping with respect to its own price, the inverse of the price level, while the supply or money is upward sloping with respect to the inverse of the price level.; Proxies for supply shifts (percentage changes in monetary base) and demand shifts (percentage changes in M1 and real income) capture money demand and supply curve shifts. Once this information is known, future inflation rates can be predicted. Ultimately, the theoretical soundness of the theory can be checked by its ability to outperform conventional measures of excess money creation and inflation.; Empirical testing confirms that the model of money market equilibrium developed here is superior to the PSTAR methodology of Hallman, Porter, and Small at gauging excess money creation in the U.S. economy and thus in predicting future price levels. The PSTAR model serves as a benchmark and proxy for conventional price forecasting models. Implications for interest rates, exchange rates, credit markets, and output, as well as international comparisons cast up areas for further study.