Correlations of inflation with the growth rate of money increase when data are averaged over longer time periods. Correlations of inflation with the growth of money also are higher when high-inflation as well as low-inflation countries are included in the analysis. We show that serial correlation in the underlying inflation rate ties these two observations together and explains them. We present evidence that averaging increases the correlation of inflation and money growth more when the underlying inflation rate has higher serial correlation.
JEL classification: E31, E5
Key words: money and inflation, inflation, quantity theory
The authors have benefited from comments from participants in the conference Money and Monetary Policy, sponsored by the Federal Reserve Bank of Atlanta and Fordham University. James R. Lothian and Paul D. McNelis provided helpful comments on an earlier draft. Budina Naydenova provided helpful research assistance. The views expressed here are the author's and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author's responsibility.
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