Money and inflation: Is monetary policy useful?

In this paper, we establish a connection between money growth and inflation identified under different monetary policy regimes using UK data. We study the (in)stability of this quantity theoretic relationship, and interpret it through the lens of a New Keynesian model of monetary policy with alternative policy rules. We document the implied instability of low-frequency correlations between money growth and inflation emerging as a result of differences in monetary policies epitomizing the UK experience since the 1970s. In general, we show that monetary policy regime shifts contribute to the breakdown of the quantity theoretic propositions. Our findings seem to lend support to related work for the US over the last century.