Quantity Theory of Money

This lesson discusses money and inflation along with an overview of the long-run and short-run economics. The video talks about quantity theory of money and shares examples to understand how increase in money supply impacts inflation rate within an economy for both advanced and developing country.

Data Source: Federal Reserve Bank of St. Louis, Velocity of M2 Money Stock [M2V], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/M2V, May 28, 2022.

Inflation is of two types: the supply side and the demand side. Printing excess money did not yield much inflation and we will have to wait and see the next quarter for the demand side effect to structure out. In this module, the inference that money supply growth impacts inflation in the long term is ambiguous and not mentioned in any of the textbooks. The texts books agree that the growth of inflation is a monetary phenomenon; however, looking at the past decade, this looks a bit ambiguous. The module was developed sometime back, and since then the US economy is registering high inflation. The recent surge in inflation in the US is a combination of both the demand and supply side  — the interest rates were low for a long time, supply-side issues from the fallout of the Russian invasion of Ukraine, extended lockdown in China especially Shanghai due to COVID19, printing too much money for the stimulus, etc.  

Video : The middle Road | Quantity Theory of Money 

Read ===> Open Market Operations & Interest Rates

Key takeaways

  • Nominal GDP is proportional to the stock of money
  • Effect of money over inflation over the long run and Fischer Effect (inflation and nominal interest rates)
  • Open Market Operations and Quantitative Easing
  • Effect of QE (Asset Purchases) on inflation example US, EU, Japan


Suggested Readings

Is inflation (or deflation) “always and everywhere” a monetary phenomenon? | My intellectual journey in central banking by Masaaki Shirakawa. An excellent read by ex-governor Bank of Japan Classical Dichotomy. 

Dr. Paul Krugman shares thoughts on the pandemic and the monetary and fiscal policies for managing the Covid-19. He discusses the effects on QE on inflation in the US among others. Recommended watch from The middle Road