Money supply factors and lags

Item Lag, operable time frame Notes
M1 4-10 months, averages 6-9
M2 9-20 months, averages 12-18
M3 9-20 months, averages 12-18
Monetary base 6-12 months, averages 8-16 High importance, controlled directly
Fiscal (government) stimulus 9-24 months, averages 12-18
Bank credit Two lags - one is 3-6 months, and the other is similar to M3 High importance
Fed & comm'l repos Two lags - one is virtually immediate and is more important, and there is also a secondary lag of about 10 months High importance to stock market - the best single stat proxy for the Fed
Securities Lending Two lags - one is virtually immediate, and the other varies between 1-4 months High importance to bond interest rates

The changing velocity of money is the primary reason for the wide range in lags from the time money is created until it is reflected in inflation. With high inflation, money moves faster and there appears to be more in the system. Note that these numbers are only guidelines as of 2008.

Also note that the lags above only apply to the U.S. Federal Reserve. Other countries central banks may have different lags since money measure definitions differ.

"Significant changes in the growth rate of money supply, even small ones, impact the financial markets first. Then, they impact changes in the real economy, usually in six to nine months, but in a range of three to 18 months. Usually in about two years in the US, they correlate with changes in the rate of inflation or deflation.
The leads are long and variable, though the more inflation a society has experienced, history shows, the shorter the time lead will be between a change in money supply growth and the subsequent change in inflation."
-- Milton Friedman, economist

Other views of lags, velocity, etc.

There is the classic time lag between when excess money is actually created and how long it takes for it to be *fully* reflected in all prices as the following chart clearly shows.

The big aggregates like M2 & M3 take the longest. The lag is significantly shorter for the effect on financial assets too, no more than about two years being our rule of thumb as noted above.

And changes in velocity also affect the lag. You can see it easily during the 1965-1985 period, where the CPI narrows the gap a bunch.

When we get to the truly "hot" money like TOMOs and TIOs, the lag is measured in days with financial assets.

A case could also be made that the size of the gap between CPI and money supply is a workable measure for real productivity. Also, the gap between M2 and M3 can represent how much the Fed is pumping on a relative basis. Note that the last two are only valid when judged on a longer term.

A longer term picture showing the relationship of one definition of velocity to the entire GDP and inflation picture, but excluding any productivity measures.

A shorter term picture looking at major money supply areas, with a time lag as a prediction aid.