The realtionship between money supply and inflation: Regression analysis with time lags

1. Introduction

The alliance between capital run and inflation locate is considered to be controversial and debatable economic topic, which has been subject of mental test for various research studies. Consequently, numerous conclusions and perspectives have been presented regarding the nature of the relationship and its degree of correlation coefficient.

This paper examines the key issues between money supply and inflation. Initially, thorough description for each variable is given, which is further exposit by employing the core monetary theories to interpret and justify the relationship. Afterwards, experiential studies with different and contradicting conclusions are discussed. Moreover, empirical analysis is performed by travel rapidly a standard regression. Its purpose is testing the degree of correlation between the growth rate of money in menses t-1 and inflation in period t. For the regression analysis information for United States has been used, concerning a 29-year period. In the end, conclusions are drawn ground on the results interpretations, which are then compared to the reality and the theory.

2. Money Growth

Money is considered to be anything commonly accepted as a final defrayment in exchange for goods and services. In addition, it is found to have four-spot main functions: means of payment, store of value, unit of account and virtually essentially medium of exchange (Edgmand et al., 2001).



Money is not unending and absolute; therefore its perception greatly varies among the economists, mostly ground on personal judgment.

By being the most liquid asset, moneys purchase power is largely determined by the money claim and supply, and as well by the velocity of circulation (the speed with which money changes pockets).

One arguable issue is the defining of money supply beyond being only the cash in circulation outside banks positively charged bank deposits (Solow, 2004). Thus, there are three definitions of money supply. M1, or the narrow definition of...

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