Does global liquidity help to forecast U.S. inflation?

We construct a measure of global liquidity using the growth rates of broad money for the G7 economies. Global liquidity produces forecasts of U.S. inflation that are significantly more accurate than the forecasts based on U.S. money growth, Phillips curve, and autoregressive and moving average models. The marginal predictive power of global liquidity is strong at 3-year horizons. Results are robust to alternative measures of inflation. JEL codes: C22, C53, E37, E47 Keywords: predictive accuracy, global liquidity, money growth, inflation.
ACCURATE INFLATION FORECASTS are essential for successful monetary policymaking. Effective predictors are essential for producing accurate forecasts. In the recent past, characterized by low and stable inflation, researchers in academia [...]