The paper finds that an increase in money supply over the long-run results in a higher rate of inflation and thus provides support for the quantity theory of money. It establishes that inflation is essentially a monetary phenomenon. However, the money supply does not instantly influence the price levels; the impact of money supply on inflation has a considerable lag of about 9 months. While the study shows that the money supply works through the system in less than a year, it also points out that the system takes rather long to converge to equilibrium if shocks appear in any of the three variables, viz., GDP, money supply, and prices.
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Find related papers by JEL classification: N15 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - Asia including Middle East N31 - Economic History - - Labor and Consumers, Demography, Education, Income, and Wealth - - - U.S.; Canada: Pre-1913 E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
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