Title

Broad Divisia Money, Supply Pressures, and U.S. Inflation Following the COVID-19 Recession

Author(s)

Michael D. Bordo Michael Bordo (Rutgers University, NBER, and Hoover Institution)

John V. Duca John Duca (Oberlin College)

Barry E. Jones Barry Jones (Binghamton University)

Abstract

The rise of U.S. inflation in 2021 and 2022 and its partial subsiding have sparked debates about the relative role of supply and demand factors. The initial surge surprised many macroeconomists despite the unprecedented jump in money growth in 2020-21. We find that the relationship between consumption and the theoretically based Divisia M3 measure of money (velocity) can be well modeled both in the short- and long-runs. We use the estimated long-run relationship to calculate the deviation of actual velocity from its long-run equilibrium and incorporate it into a P-Star framework. Our model of velocity significantly improves the performance of the P-Star model relative to using a one-sided HP filter to calculate trend velocity as, for example, used by Belongia and Ireland (2015, 2017). We also include a global supply pressures index in the model and find that recent movements in U.S. inflation largely owed to aggregate demand driven macroeconomic factors that are tracked by Divisia money with a smaller role played by supply factors.

Creation Date

2025-07

Section URL ID

Paper Number

345

URL

https://gceps.princeton.edu/wp-content/uploads/2025/07/wp345_BordoDucaJones_DivisiaMoneyCOVID.pdf

File Function

Jel

E51, E41, E52, E58

Keyword(s)

Money, Divisia, Inflation, Supply Chain Disruptions

Suppress

false

Series

3