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

Abstract

What determines the strength of the relationship between money growth and inflation? A large literature suggests that it has weakened since the 1980s, without a definitive explanation of the cause. I explore how population age structure explains changes in the pass through of money growth rates to inflation. I show that the quantity theory of money holds over long time horizons, with sizable estimates of the impact of money growth on inflation in the short to medium term. Various measures of population age structure have significant impact on the strength of this relationship. These demographics account for an increase in the transmission of money growth to prices in the 1970s and a weakening throughout the great moderation. The baby boomer cohort, now in the age groups around retirement, may exert upward pressure on this money transmission to prices at present, with ambiguous implications in the future as low fertility and rising longevity persist.