Inflation is not a monetary phenomenon: A critical analysis of the theoretical model that inspires the European Central Bank

Giancarlo Bertocco and Andrea Kalajzić

Chapter 2 in Central Banking, Monetary Policy, and the European Central Bank, 2025, pp 20-56 from Edward Elgar Publishing

Abstract: The page dedicated to monetary policy on the European Central Bank (ECB) website opens with the following words: “Price stability is the best contribution that monetary policy can make to economic growth.” These words summarize the content of the glorious quantity theory of money. This chapter aims to show that the quantity theory of money cannot explain the functioning of contemporary economies. In other words, it will be shown that the ECB makes its decisions based on a theoretical model incapable of properly interpreting the most relevant economic phenomena characterizing contemporary economies. Furthermore, the chapter describes the consequences produced by the fact that the ECB makes its decisions based on a theoretical model that offers a distorted image of economic reality. In particular, it focuses on how the ECB has addressed three crises that have followed one another in the last 18 years, the first of which is the Global Financial Crisis that burst in 2007–2008. The second crisis coincides with the deflationary pressures that characterized the 2010s. Finally, the third crisis is caused by the soaring inflation rates observed since the second half of 2021.

Keywords: Inflation; Deflation; Global Financial Crisis; European Central Bank; Natural rate of interest; Loanable funds theory (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035324262
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