The Correlation between Inflation and Money Supply

Abstract

Inflation is a macroeconomic disequilibrium that affects all households and firms. The aim of our study is to investigate inflation in Romania, the causes that determine it and the relationship between money supply and inflation. There is evidence that inflation in many countries is of monetary origin. We used the data provided by the World Bank and the National Bank of Romania on inflation and broad money as a percentage of GDP. For the period 2005-2021, in Romania the data shows that inflation values do not exceed 10% and do not deviate significantly from the inflation target, while the money supply increases by an average of 11.63% per year. Our paper employs VAR model and endorses the thesis that there is a long-run relationship between inflation and money supply in Romania at a 5% significance level.

Keywords

• inflation
• money supply
• monetary aggregates
• monetarism