Broad Divisia money, supply pressures, and US inflation following the COVID-19 recession

Abstract

The rise of U.S. inflation in 2021 and 2022 and its partial subsiding have sparked debates about the relative role of supply and demand factors. The initial surge surprised many macroeconomists despite the unprecedented jump in money growth in 2020–21. We find that the relationship between consumption and the theoretically based Divisia M3 measure of money (velocity) can be well modeled both in the short- and long-runs. We use the estimated long-run relationship to calculate the deviation of actual velocity from its long-run equilibrium and incorporate it into a P-Star framework. Our model of velocity significantly improves the performance of the P-Star model relative to using a one-sided HP filter to calculate trend velocity as used by other researchers. We also include a global supply pressures index in the model and find that recent movements in U.S. inflation largely owed to aggregate demand driven macroeconomic factors that are tracked by Divisia money with a smaller role played by supply factors.

Publisher

Cambridge University Press

Publication Date

8-22-2025

Publication Title

Macroeconomic Dynamics

Department

Economics

Document Type

Article

DOI

https://doi.org/10.1017/S1365100525100278

Keywords

Money, Divisia, Inflation, Supply chain disruptions, E51, E41, E52, E58

Language

English

Format

text

Link to Full Text

Share

COinS