The Central Bank of Luxembourg published Cahier d’études No. 195, by Gianni Amisano and Roberta Colavecchio, assessing whether monetary aggregate growth can provide an early warning of medium-term inflation risks in the United States and the euro area. The study concludes that the money growth–inflation relationship is non-linear and that faster money growth can signal a higher probability of moving into a “high” inflation regime, making monetary indicators informative in certain episodes. Set against the European Central Bank’s 2021 move from the former two-pillar framework to an integrated approach combining economic analysis with monetary and financial analysis focused on transmission and tail risks, the paper reviews theoretical and empirical evidence and applies a regime-switching approach. Inflation is modelled as a univariate autoregressive process with regime changes, where transition probabilities depend on money growth; results indicate predictive value particularly in the 1970s, the early 1980s, and the post-pandemic period, and provide an explanation for why monetary growth appeared to offer little signal between 1990 and 2021. The Central Bank of Luxembourg notes that the views expressed are those of the authors and not necessarily those of the Central Bank of Luxembourg or the Eurosystem.
Central Bank of Luxembourg 2025-02-14
Central Bank of Luxembourg publishes research linking money growth to shifts into high inflation regimes
The Central Bank of Luxembourg released a study by Gianni Amisano and Roberta Colavecchio on the relationship between monetary aggregate growth and medium-term inflation risks in the U.S. and euro area. The research finds a non-linear relationship, with faster money growth indicating a higher probability of entering a high inflation regime, particularly in certain historical periods. The study employs a regime-switching approach, highlighting predictive value in the 1970s, early 1980s, and post-pandemic era, while noting limited signals from 1990 to 2021.