Money Growth and Inflation: A Quantile Sensitivity Approach

Abstract

An innovative method is proposed to construct a quantile dependence system for inflation and money growth. By considering all quantiles and leveraging a novel notion of quantile sensitivity, the method allows the assessment of changes in the entire distribution of a variable of interest in response to a perturbation in another variable's quantile. The construction of this relationship is demonstrated through a system of linear quantile regressions. Then, the proposed framework is exploited to examine the distributional effects of money growth on the distributions of inflation and its disaggregate measures in the United States and the Euro area. The empirical analysis uncovers significant impacts of the upper quantile of the money growth distribution on the distribution of inflation and its disaggregate measures. Conversely, the lower and median quantiles of the money growth distribution are found to have a negligible influence. Finally, this distributional impact exhibits variation over time in both the United States and the Euro area.