Having constructed an M3 inflation measure for Australia over the last several decades the picture is one that if put to the average joe on the street would much more accord with how they ‘feel’ inflation in their everyday lives. The measure for Australia shows much higher levels of inflation over the last decade and also several short periods of deflation in the two decades before that.
This is still only a thought bubble with no peer review as yet, I am an academic economist with an honours degree, a PhD and some publications in econimics, but currently non-practising. I can come up with these ideas free from the constraints many non-orthodox economists must deal with on a day to day basis.
So the thought bubble will be expanded to Ireland. Basically the same methodology, annual growth in M3 minus short term bank interbank interest rates (90 days). With the monetary unification of the European Union the classic measures of M3 for each member country became obsolete overnight. However, Ireland has constructed it’s own measure of M3. The measure is known as the Irish contribution to the equivalent euro-area aggregate M3.
The Iriish Central Bank put a great deal of thought into how a new measure for M3 could be constructed given the financial implication of the Maastricht treaty. The following document is one example, http://www.centralbank.ie/data/QrtBullFiles/2003%2003%20Money%20Supply%20in%20Ireland.pdf.
So let us cut to the chase and have a look at M3 Inflation in Ireland. The following graph clearly show that with my measure of M3 Inflation, Ireland lurched into a sever period of deflation in 2008 and has slowly been clawing back ever since. The deflation rate plunged to levels of 15% .
So what is the story for Australia? As this blog has explained in earlier posts, the deflation episode for Australia is yet to happen. For comparisons sake I constructed a graph of each countries M3 Inflation over the same period from 2004. The good news for Australia from this graph is that the inflationary period does not seem to be anywhere near as severe as what happened in Ireland. One would assume that the resulting deflation may not be as severe as well. To repeat the often quoted copout line, only time will tell.