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Central bank balance sheet, money and inflation

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  • Reynard, Samuel

Abstract

Strong central banks’ balance sheet expansions in response to economic crises have been followed by different inflation paths. This paper shows that whether or not those expansions resulted in a substantial increase in inflation is function of the associated broad money expansion, which depends on whether the private sector was part of the money creation process as an intermediary to the central bank financing the government. Inflation can be explained by an equilibrium analysis based on the quantity theory of money. This analysis explains why inflation remained low after quantitative easing in the US following the global financial crisis, but has substantially and persistently increased after the Covid-19 pandemic.

Suggested Citation

  • Reynard, Samuel, 2023. "Central bank balance sheet, money and inflation," Economics Letters, Elsevier, vol. 224(C).
    • Handle: RePEc:eee:ecolet:v:224:y:2023:i:c:s0165176523000538
    DOI: 10.1016/j.econlet.2023.111028
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    References listed on IDEAS

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    Cited by:

    1. Michael D. Bordo & John V. Duca, 2023. "Money Matters: Broad Divisia Money and the Recovery of Nominal GDP from the COVID-19 Recession," Working Papers 2306, Federal Reserve Bank of Dallas.

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    More about this item

    Keywords

    Central bank balance sheet; Inflation; Monetary aggregates; Quantitative easing;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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