MONEY, INFLATION, AND OUTPUT GROWTH - DOES THE AGGREGATE DEMAND - AGGREGATE SUPPLY MODEL EXPLAIN THE INTERNATIONAL EVIDENCE

Using annual post-war data for 32 countries, it is shown that output and the price level are positively related along the aggregate supply and negatively related along the aggregate demand curve. This implies that the negative correlation between inflation and growth simply means that the price level has been countercyclical as aggregate supply shocks dominated aggregate demand shocks. It is also shown that money growth has positive and permanent effects on inflation, but may affect output only in the short run: in the long run, money is probably neutral.