I'm not sure it makes sense to look at correlation coefficients when, if excessive M2 drives inflation, there will be a lag between them.
Just eyeballing it, until 1980 there is about a 5-year lag between the shape of M2 and inflation, and as time goes by the lag becomes shorter and shorter. It would be interesting to do a correlation with a gradually-decreasing lag time. Maybe it could be done the other way around, to calculate the lag-time function that maximizes the correlation between M2 and inflation.
It does make some intuitive sense that increasing computerization and internet usage would shorten lag times.
That is a point to consider. However, Powell is not positing interest rate hikes now to tame inflation five years hence. Powell is positing interest rates hikes now to tame inflation now.
If Powell were to inject a time dimension into his arguments for rate hikes, that would definitely alter the analysis. At a minimum, we would need to time-shift rate hikes and money supply growth against inflation to assess the likely impacts.
However, he's not doing that. The thesis laid out by Powell and the rest of the FOMC places monetary policy and its effects in the here and the now--only in the here and the now the thesis is questionable logic at best.
Also let us not forget that correlation coefficients are not formulaic. They are a broad metric of the statistical relationship between an independent and a dependent variable. The closer the metric gets to +/-1, the more definite the relationship, until at +/-1 you have a linear positive (or negative) relationship.
This is also why it helps to examine covariance alongside correlation, to get a measure of the underlying strength of the relationship. When there is high correlation and high covariance, you have an extremely strong relationship. Low correlation and low covariance suggests a weak relationship.
I'm not sure it makes sense to look at correlation coefficients when, if excessive M2 drives inflation, there will be a lag between them.
Just eyeballing it, until 1980 there is about a 5-year lag between the shape of M2 and inflation, and as time goes by the lag becomes shorter and shorter. It would be interesting to do a correlation with a gradually-decreasing lag time. Maybe it could be done the other way around, to calculate the lag-time function that maximizes the correlation between M2 and inflation.
It does make some intuitive sense that increasing computerization and internet usage would shorten lag times.
That is a point to consider. However, Powell is not positing interest rate hikes now to tame inflation five years hence. Powell is positing interest rates hikes now to tame inflation now.
If Powell were to inject a time dimension into his arguments for rate hikes, that would definitely alter the analysis. At a minimum, we would need to time-shift rate hikes and money supply growth against inflation to assess the likely impacts.
However, he's not doing that. The thesis laid out by Powell and the rest of the FOMC places monetary policy and its effects in the here and the now--only in the here and the now the thesis is questionable logic at best.
Also let us not forget that correlation coefficients are not formulaic. They are a broad metric of the statistical relationship between an independent and a dependent variable. The closer the metric gets to +/-1, the more definite the relationship, until at +/-1 you have a linear positive (or negative) relationship.
This is also why it helps to examine covariance alongside correlation, to get a measure of the underlying strength of the relationship. When there is high correlation and high covariance, you have an extremely strong relationship. Low correlation and low covariance suggests a weak relationship.