Question

Has M2 always been a useful tool for forecasting inflation? Explain.

Answer 1

M2 will be including small denomination time deposits along with savings deposits and money market deposits accounts along with retail money market mutual fund shares so these are always tracking the liquidity into the overall economy and empirical evidence shows that high rate of growth in M2 were associated with high rate of inflation and relatively lower growth rate of M2 in many countries were are also associated with lower growth of inflation in earlier part of 1980.

After the 1988, it has seemed that the growth of M2 money was not a good forecaster of inflation because the correlation was very low and the growth of M2 has not been utilised for forecasting as a inflation because there is less volatility in changes of this type of money due to changes in inflation because the correlation is very low.

answered by: anonymous