• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Is inflation always and everywhere a monetary phenomenon?

Extracts from this document...


Is inflation always and everywhere a monetary phenomenon? The phrase "inflation is always and everywhere a monetary phenomenon" was first coined by the economist Milton Friedman in 1956. By this he meant that inflation can only be caused by increases in the money supply. If his statement holds true then controlling inflation is possible simply by controlling the money growth rate. Inflation is usually taken to mean a continual increase of the general price level. Typically a small amount of inflation is seen as necessary in order to keep money active in the economy and allow flexibility in the labour market. The answer to the question depends largely on the qualification of the word inflation as Friedman originally meant it. Friedman's argument actually referred to high and persistent levels of inflation. High inflation was and is still seen as a bad thing, and control of it imperative for a successful economy. The belief that an increase in the money supply causes inflation stems back to old Classical theory. The government can increase the money supply by printing more money. Classicalists believe that a policy of this kind is a pointless and even risky tactic as it can have no long-run effect on the level of output in the economy. ...read more.


They did not identify such a strong correlation for those countries with less than 20% inflation. However, even in these countries the relationship was still positive.2 Figure 1.3 The results obtained by De Graauwe and Polan confirm the work of Vogel (1974), Dwyer and Hafer (1988, 1999), Barro (1990), Pakko (1994), Poole (1994), and McCandless and Weber (1995). All of their work establishes a strong positive correlation between money growth and inflation using various measures of money.3 So, we can safely assume that a high rate of money growth is almost always accompanied by a high level of inflation. This does not in itself prove that inflation is always and everywhere a monetary phenomenon. It could be that the high levels of inflation are triggering the increase in the money supply. Increased prices mean that people demand more money and therefore money must be printed. This is the argument of Fischer et al. whose findings reveal that "more often than not, causation runs from exchange rate changes and inflation to money growth".4 Graham Dawson agrees saying that "no correlation between money and prices, however strong, is sufficient to establish a causal effect flowing from money to prices".5 However Fischer et al. ...read more.


It is generally accepted that control of the money supply will provide control of inflation. Therefore we can conclude that a high and persistent level of inflation is always and everywhere a monetary phenomenon. That is V and Y have only a small effect in the equation. Whilst the effect of an increase in the money supply may not have a directly proportional effect on prices, any increase in the money supply will have some effect on prices. Seeing as the link between the money supply and inflation is so clear, it seems strange that any government would choose to continue printing money. One explanation, particularly in less developed countries, may be that if an economy is not growing then people get upset which may result in anarchy. If people are getting better off then there is less industrial unrest. If you are not getting better off then you will be miserable, things can be made 'better' by allowing the money supply to increase. This, though, is not sustainable as only real things can be given to people, otherwise there will be hyperinflation. Moderate control or monitoring of the money supply must always be a policy for any government that wishes to be successful. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Macroeconomics essays

  1. What is the relationship between money supply and inflation?

    Finally the Central Bank (Bank of England) can control the assets of banks and the amount of lending they can make. Banks can also restrict the amount of money they give out by imposing a rule of a minimum reserve ratio.

  2. Can Economist Predict House Price Movements

    Consequently these type of events can make it more difficult to control inflation, as was seen previously with the Kuwait war in 1990, where inflation was at 9.5. In conclusion when the data was used to perform the regression analysis test, it can be seen in fig 1.3 that there are strong relationships between AHP and DI with perfect correlation.

  1. Both supply and demand shocks can cause inflation, but, without money growth the inflation ...

    This affect of money growth is what led to the Monetarist inflation theory, the quantity theory of money. "The quantity theory of money is the proposition that in the long run, an increase in the quantity of money brings an equal percentage increase in the price level.

  2. Discuss the resort industry in Malaysia specifically Redang Island. Identify factors contributing to ...

    Ecotourism could become a central of sustainable development, offering one realistic key solution to the visible conflict between environmental protection and economic growth. Besides being a powerful motivation for governments to protect areas, the ecotourism industry provides an enhanced image for the nation and for the tourism sector as a whole.

  1. The Global Economic Crisis. The present project analyses different approaches of the crisis ...

    Due to the limited availability of the offers (one-day time span), the level of excitement and involvement in the customers is elevated, thus forging a feeling of importance. Evidently, it is of the utmost importance for customers to reach the minimum eligible number.

  2. The Policy Implications of the Relationship between Inflation and Unemployment in Canada (1967 ...

    Any temporary "money illusion" however is corrected in the long run by agents revising their expectations. Once workers realised their real wages were not increasing due to the increase in inflation, any reduction in unemployment would remain temporary but that the rise in inflation would be permanent as it had been built into agents' expectations.

  1. Singapore Economics

    3.1 Positive of Growth Source: SDS, 2009 There are many benefits for economic growth, from the above graph, we can see a large sum of investments flowing into Singapore. This will boost the confidence of the economy, allowing the government to invest in education, infrastructure and reserve funds.

  2. The purpose of this coursework is to study the characteristics of inflation in the ...

    Therefore, inflation can be defined as a process of devaluation of money, or, figuratively speaking - a situation where too much money to "hunt" for fewer goods. Therefore, we can see that inflation has serious negative economic consequences, as does considerable damage to the state's economy, reducing its effectiveness and

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work