The Theory of Inflation and the Critique of Monetary Theory

55 Pages Posted: 13 Feb 2017

See all articles by Yiping He

Yiping He

Sun Yat-sen University (SYSU) - Department of Economics

Wei Shi

Sun Yat-sen University (SYSU) - Department of Economics

Xiaoming Gong

Sun Yat-sen University (SYSU) - Department of Economics

Xuezhi Zhang

Sun Yat-sen University (SYSU) - Department of Economics

Hualing Chen

GuangDong GuangYe Investment Group Corporation

Chun Ou’Yang

GuangDong GuangYe Investment Group Corporation

Gang Zhao

University of Bath - Department of Economics

Date Written: November 16, 2016

Abstract

Friedman’s monetary theory suggests that the supply of money is constantly equal to the demand of money. Therefore, it cannot justify that inflation is indeed caused by over issuance of money. The root cause of inflation should be the short supply of a basket of goods. The weight of each goods in this basket is based on their scarcity in the actual supply and demand environment. The over issuance of money by the government is only one of the many reasons behind the short supply of a basket of goods. Since more money has been pumped into the circulation, the amount of goods in the basket becomes smaller in relative terms, hence the short supply. Actually, over issuance of money, as well as short supply of raw materials, labor, and products all contribute to the potential occurrence of inflation. One should not simply attribute all inflation phenomenon to the over issuance of money. The nature of money is credit. Therefore, as long as the reserve and trading part of the money’s creditworthiness is acceptable by the market, there should be no directly linkage between inflation and amount of money in the circulation.

Keywords: Inflation, Monetary Theory, Griffen's Goods, Supply and Demand Theory

Suggested Citation

He, Yiping and Shi, Wei and Gong, Xiaoming and Zhang, Xuezhi and Chen, Hualing and Ou’Yang, Chun and Zhao, Gang, The Theory of Inflation and the Critique of Monetary Theory (November 16, 2016). Available at SSRN: https://ssrn.com/abstract=2915422 or http://dx.doi.org/10.2139/ssrn.2915422

Yiping He

Sun Yat-sen University (SYSU) - Department of Economics ( email )

Hong Kong
China

Wei Shi

Sun Yat-sen University (SYSU) - Department of Economics ( email )

Hong Kong
China

Xiaoming Gong

Sun Yat-sen University (SYSU) - Department of Economics ( email )

Hong Kong
China

Xuezhi Zhang

Sun Yat-sen University (SYSU) - Department of Economics ( email )

Hong Kong
China

Hualing Chen

GuangDong GuangYe Investment Group Corporation ( email )

GuangZhou, GuangDong
China

Chun Ou’Yang

GuangDong GuangYe Investment Group Corporation

GuangZhou, GuangDong
China

Gang Zhao (Contact Author)

University of Bath - Department of Economics ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom
447846456621 (Phone)

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