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Reserve Bank of New Zealand comment on the relation between the money supply and inflation

From: Hamish Pepper [mailto:Hamish.Pepper@rbnz.govt.nz]
Sent: Thursday, 13 March 2008 1:27 PM
To: Harkness, Leigh
Cc: Emma Clark
Subject: Reliable monetary indicators of inflation in New Zealand

Dear Leigh,
Thank you for your email dated 11 March 2008 regarding reliable monetary indicators of inflation in New Zealand.


Firstly, please note that the Consumers Price Index (CPI) in level terms is not inflation, as you seem to imply in your work. Inflation is usually defined as the annual percentage change in this index.


The Bank does not currently use monetary aggregate measures to predict future inflation. Internal work at the Bank has shown that the relationship between changes in monetary aggregates and inflation is not particularly close, with changes in inflation appearing to lead changes in money over some periods - suggesting that people respond to higher prices by demanding more money, rather than increases in monetary aggregates causing increases in inflation. 


Essentially, we find that none of the monetary aggregates are reliable predictors of future inflation. An upcoming article on the use of money and credit measures in contemporary monetary policy covers this topic in greater depth and may be of interest to you. It is due to be published in the upcoming March Reserve Bank Bulletin which will be available at http://www.rbnz.govt.nz/research/bulletin/.
I hope this addresses the issues raised in your email.
Kind regards,



Hamish Pepper | Economic Analyst
Phone: 04 471 3672 | Extn: 3672