Missing money found causing Australia's inflation

- We examine the much neglected role money plays in determining Australia's inflation.
- There is a strong nexus between excess currency growth and Australia's inflation.
- Currency growth, although still significant, became less important after inflation targeting.
- Velocity, the sine qua non of the Quantity Theory, has been remarkably stable.

This paper examines the nexus between excess currency growth and inflation in Australia. It first canvasses the operation of monetary policy. Using different econometric techniques, it next examines how well excess money supply growth, measured in terms of currency and M3, explains Australia's inflation over the long term from 1970-2015, and then more specifically before and after the adoption of inflation targeting. Its key result is that excess money growth has been the main determinant of Australia's inflation, although became less important during the inflation targeting era. This implies the velocity of currency, the sine qua non of the Quantity Theory of Money, has been remarkably stable. Given the role excess currency plays in generating Australian inflation, it should be afforded greater prominence in monetary policy deliberations.