Okay Boomer... Excess Money Growth, Inflation, and Population Aging

Abstract

Is inflation a monetary phenomenon? In the decades since the influential work of Milton Friedman, the great moderation has seemingly put to bed the idea that monetary aggregates serve as a useful tool for policy makers. While many point to a structural change in the underlying relationship between money growth and inflation, there is limited understanding as to why this monetary transmission has broken down. In this paper, I provide evidence that population age structure has an important impact on the relationship between excess money growth and inflation. Estimating these effects using a long run sample of data, I find that the one-to-one relationship between excess money growth and inflation implied by the quantity theory appears to hold over long horizons, with short-to-medium run effects that are smaller, but significant. I then show that changes in the population age structure, particularly as the baby boomer generation has moved through it, can explain a strengthening of this transmission during the highly inflationary period of the 1970s, as well as a complete disappearance during the 1990s and early 2000s. At present demographic headwinds on this relationship seem to have abated, with their effect opening the door for a potential return to money driven inflation.