THE LONG-RUN LINK BETWEEN MONEY GROWTH AND INFLATION

Is inflation always a monetary phenomenon? Many economists believe tha t the link between money growth and inflation in the U.S. has weakened over the last two decades due in part to the Federal Reserve's policy experiment in 1979-1982 and innovations in the financial sector of th e economy. I find that the long-run relationship between money growth and inflation is strong in a statistical sense and important economica lly. The key result is that the trend or growth component in CPI infla tion is entirely due to the trend component of monetary base growth.