Wednesday, July 23, 2008

Inflation as a Monetary Phenomenon

Economics instructors frequently invoke a phrase made popular by Milton Friedman, "Inflation is always and everywhere a monetary phenomenon." It summarizes some of Friedman's work showing that it matters less what backs money than what the relationship is between the money supply and total output. Whether fiat or specie backed, the relationship between output and total money supply provides more insight to the price level than anything else.

Over on the Financial Times website, I ran across a great interactive that illustrates the relationship between money (and monetary policy) and inflation over time. The graphic shows monetary policy rates for four major central banks (Bank of England, Federal Reserve, European Central Bank, and the Bank of Japan) and how those rates relate to inflation rates in their economies. It also provides some basic information about each of the four banks. It's a useful and interesting tool for introducing the concept to your economics classes.

I look forward to your comments.


Normandy said...

You write very well.

Tim Schilling said...

Thank you. Welcome to the blog.