The U.S. Excess Money Growth and Inflation Relation in the Long-Run: A Nonlinear Analysis

Abstract

This paper specifies, estimates, and evaluates the relation between inflation rate and excess money growth, defined as the difference between money supply growth and real GDP growth, using a smooth transition regression model and U.S. data. The results indicate that the relation is a nonlinear one as supported by the linearity tests. Although deterministic extrapolation exercises indicate that both the linear and nonlinear models are stable, the nonlinear model is favored by several misspecification tests. Deterministic extrapolation exercises also indicate that an increase in excess money supply has positive effect on the long-run inflation rate but the effect is not one-to-one even in high-inflation regime.Inflation; Excess Money Growth; Smooth Transition Regression