Calculate M1, and M2 multiplier (it is the ratio of M1, or M2 to monetary base).

University alum Ronald Liu, the Managing Director of the private equity division of Citic, the world largest investment bank, needs to place US$200 million fixed coupon bonds. In order to price these bonds, Ronald needs to understand the U.S. inflation situation. He has done some preliminary research of the U.S. inflation in recent years. Ronald noticed that after the 2008 financial crisis, even with three consecutive quantitative easing by the Federal Reserve Bank, which increased the Fed’s balance sheet enormously, the U.S. inflation rate was relatively tamed. However, during the pandemic, the ease of monetary policy by the Fed, instead, resulted drastic increase in inflation which reached as high as over 9%.

Ronald wants to know why. He turns to you, a group of talented USC students. He asks you to use data from 2000 up to current to analyze and address his puzzles. He would also like to know if the current inflation is a short-term phenomenon.

Please submit an excel file with your data as well as your analyses. You also need to include a sheet in your excel file to explain your analyses and conclusions.

Does excessive issuing of money cause high inflation? After the 2008 financial crisis, the Federal Reserve Bank of the United States launched a series of quantitative easing (QE1, QE2, and QE3). Similar policy has been taken by the Bank of Japan. However, inflation did not show up in the US. At the onset of Covid 19 in the US, the Fed ejected massive liquidity into the economy. Will this time be different that we should expect a higher inflation rate?

Go to https://www.stlouisfed.org. Download the U.S. monetary base, M1, M2, and excess reserve of depository institutions, for 2000 – now.

1. Plot MB, M1, and M2.
2. Calculate M1, and M2 multiplier (it is the ratio of M1, or M2 to monetary base).
3. Plot them against time.
4. Plot the excess reserve of depository institution. For a better viewing of the graphs, you may want to separate 2008 event and Covid 19 period. One way of doing that is to break the sample into two: one from 2000 to maybe 2015 for studying 2008 monetary policy, and the rest for Covid 19. Explain the plots.
5. What could be the reasons for the QEs not generating high inflation in the US?
6. Going forward, do you think that the inflation will be higher in the US? Why?