Money and output asymmetry: the unintended consequences of central banks’ obsession with inflation

ABSTRACT

The study re-examines the relationship between money and output for the US and the UK using quarterly data up to 2019. Modern central banks are focused on controlling inflation and adjust their monetary policy and liquidity accordingly. However, it is common practice to overlook the precise effects of those actions on other variables. Unlike prior research, which has mainly focused on the linear relationship, this paper examines the asymmetric impact of money on output. The results show that a decrease in the amount of money has a much more adverse impact on output than an increase. Globally, during COVID-19, there was an infusion of liquidity that might have been useful in the short term, but the withdrawal of that excess liquidity, as has been done currently by some major economies, may have long-term effects on those economies’ output.

KEYWORDS:

• Monetarism
• monetary aggregates
• monetary policy
• NARDL
• output

JEL CLASSIFICATION:

• E42
• E52
• E58
• E64

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ These economies are chosen based on availability of a relatively longer time series of Divisia money aggregates. While Divisia money aggregates for Poland and the Euro Area are also available, we concentrate on the US and the UK in this study due to their similar economic structures.

² Since the Total Divisia Money series has been discontinued for the UK, we use the Divisia Money for households and Non-Financial Corporations.