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Money as an Inflationary Phenomenon

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  • Markus Pasche

    (FSU Jena)

Abstract

Empirical tests of the quantity theory and particularly the neutrality of money are based on the idea that money growth "explains", to some extent, inflation. Modern macroeconomic theory, however, considers inflation targeting central banks which use the interest rate as a policy tool, while money is seen as an endogenous outcome of financial intermediation, i.e. credit creation. A simple NKM model with fiat money demonstrates that money growth is tied to inflation, changes of output and interest rate changes. The latter are determined by inflation and output gap if we consider an inflation-targeting central bank. The quantity equation emerges from the macroeconomic transmission process but the economic causalities run from output and inflation to money creation. Hence, money growth does not explain inflation. Besides, the result does not require a sophisticated microfoundation of money demand but simply emerges from the transmission process.

Suggested Citation

  • Markus Pasche, 2018. "Money as an Inflationary Phenomenon," Jena Economic Research Papers 2018-011, Friedrich-Schiller-University Jena.
  • Handle: RePEc:jrp:jrpwrp:2018-011
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    quantity equation; endogenous money; New Keynesian Macroeconomics; inflation targeting; money demand;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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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