Implications for economic theory: inflation as a monetary problem

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Chapter 6 in The Cost of Living Crisis, 2024, pp 110-122 from Edward Elgar Publishing

Abstract: Milton Friedman, who was the high priest of monetarism and the most outspoken advocate of the monetary theory of inflation, is known to have said that “inflation is always and everywhere a monetary phenomenon”. The monetary theory of inflation is based on the quantity theory of money, which attributes the rise and fall of inflation to monetary expansion and contraction, respectively. This explanation gives the central bank undue credit for having the power to cause and put an end to inflation at will, simply by turning the tap of the money supply on and off. For this process to work, a set of counterfactual assumptions must be satisfied: the central bank can control the money supply, the velocity of circulation is constant, a monetary expansion (contraction) leads to a rise (fall) in interest rates, the level of interest rates (on its own) determines the ability and willingness of banks to lend, and the assumption that monetary expansions and contractions do not affect real output.

Keywords: Economics and Finance; Politics and Public Policy (search for similar items in EconPapers)
Date: 2024
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