Interesting “Inflation” discussion…

…at Reason.

This definition of Inflation sound right to me:

Inflation is an increase in the money supply without a corresponding increase in actual produced wealth.

…because this means average price levels will be higher.

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4 Responses

  1. The formula is MV=PK, or money times velocity (rate at which it changes hands)=Price * Output

  2. Wikipedia has a nice summary of the Monetarist view:

    http://en.wikipedia.org/wiki/Inflation#Monetarist_view

    Monetarist view

    For more details on this topic, see Monetarists.

    Monetarists believe the most significant factor influencing inflation or deflation is the management of money supply through the easing or tightening of credit. They consider fiscal policy, or government spending and taxation, as ineffective in controlling inflation.[36]

    Monetarists assert that the empirical study of monetary history shows that inflation has always been a monetary phenomenon. The quantity theory of money, simply stated, says that the total amount of spending in an economy is primarily determined by the total amount of money in existence. This theory begins with the identity:

    MV = P Q

    where

    P is the general price level;
    V is the velocity of money in final expenditures;
    Q is an index of the real value of final expenditures;
    M is the quantity of money.

    In this formula, the general price level is affected by the level of economic activity (Q), the quantity of money (M) and the velocity of money (V). The formula is an identity because the velocity of money (V) is defined to be the ratio of final expenditure ( P \cdot Q ) to the quantity of money (M).

    Velocity of money is often assumed to be constant, and the real value of output is determined in the long run by the productive capacity of the economy. Under these assumptions, the primary driver of the change in the general price level is changes in the quantity of money. With constant velocity, the money supply determines the value of nominal output (which equals final expenditure) in the short run. In practice, velocity is not constant, and can only be measured indirectly and so the formula does not necessarily imply a stable relationship between money supply and nominal output. However, in the long run, changes in money supply and level of economic activity usually dwarf changes in velocity. If velocity is relatively constant, the long run rate of increase in prices (inflation) is equal to the difference between the long run growth rate of money supply and the long run growth rate of real output.[37]

    The quote in my post is a subset of this – less refined – but easier as a meme.

  3. there are some good articles at http://www.rateinflation.com that cover what inflation is, the different types of inflation and also there is historical data for a few different countries

  4. Thanks, Pete.

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