Financial Crises, Money and Inflation

JEL codes: 
E41, E52, E58
Version Date: 
May 2012

Financial crises have been followed by different inflation paths which are
related to monetary aggregate developments during those crises. This paper
characterizes the empirical relationship between money and inflation, accounting
for monetary policy and financial sector transmission as well as equilibrium
changes and non-linearity issues. The relationship is shown to have been stable
and similar in crisis and normal times. The methodology can for example explain
why the financial crisis in Argentina in the early 2000s was followed by a
sustained high inflation whereas Japan experienced deflation in the 1990s and
2000s despite quantitative easing. The potential effects of current quantitative
easing on inflation increases over the next years are much larger when broad
monetary aggregates are considered than with analyses of interest rate spreads.