Surge of M1 Money supply and Inflation in USA: Short-run dynamic models

The study purpose is to analyze the impact of U.S. government and Federal Reserve actions on the dynamics of the M1 money supply during economic crises, particularly in 2008 and 2020, and to assess the short-term and long-term consequences of these changes on inflation and economic stability.

Methods. The research employs econometric analysis using an Error Correction Mechanism (ECM) model to evaluate the short- and long-term effects of changes in the money supply on inflation. Visualization techniques are used to illustrate the findings.

Results. The analysis revealed that during the 2008 crisis, the U.S. government focused on increasing public debt without a substantial rise in the M1 money supply. In contrast, in 2020, measures such as direct payments to households, and extensive government spending led to a four-fold increase in M1. This surge caused inflationary pressures with a certain time lag. The ECM demonstrated a rapid correction of deviations from the inflation-M1 equilibrium, indicating the presence of stabilizing effects. Short-term increases in M1 drive inflationary impacts, but further increments show diminishing effects due to expectation dynamics and central bank interventions.

Conclusions. The combination of fiscal and monetary measures in 2020 was unprecedented in scale, resulting in both positive and negative outcomes. The findings highlight the necessity of carefully balancing policies to mitigate inflationary risks while addressing economic crises. The experiences of 2008 and 2020 provide valuable insights for developing strategies to respond to future challenges.