Will the pandemic bulge in money cause high inflation?
PDF

Keywords

Pandemic bulge
Money cause
High inflation.

How to Cite

HETZEL, R. L. (2022). Will the pandemic bulge in money cause high inflation?. Turkish Economic Review, 8(4), 144–161. https://doi.org/10.1453/ter.v8i4.2277

Abstract

Abstract. The monetary aggregate M2 increased from $15,473 billion in February 2020 to $19,670 billion in February 2021, or by 27.1%.  Real M2 (M2 deflated by the CPI) increased similarly by 25.3%. This monetary acceleration, unprecedented outside of wartime, is apparent in a longer-run perspective.  From the trough of the last business cycle in June 2009 through February 2020, annualized monthly growth rates for M2 averaged 5.9%.  Over the interval March 2020 through June 2020, they averaged 65.6%.  Although diminished, rapid M2 growth continued, averaging 12.9% from July 2020 through March 2021.  Milton Friedman famously said that inflation is always and everywhere a monetary phenomenon.  If he is right, should not this bulge in money lead to an undesirably high rate of inflation? Section 1 summarizes what the Fed must do to avoid an undesirable increase in inflation.  Section 2 lays out the argument in terms of a need for procedures that ensure monetary control.  Section 3 describes the Fed’s new monetary policy called “flexible-average-inflation targeting” (FAIT).  It highlights how radical a departure FAIT is from the policy of the Great Moderation as a consequence of making the unemployment rate an independent goal rather than using its changes as an indicator variable for whether the economy is growing unsustainably fast or slow. Section 4 draws out the parallels between FAIT and the monetary policy followed in the 1970s.  It makes the argument that unless the FOMC reinstates the policy of preemptive increases in the funds rate guided by the necessity of unwinding the 2020 bulge in M2, it will inaugurate an undesirably high period of inflation.  Section 5 argues that in many ways with its dismissal of money FAIT resembles modern monetary theory (MMT) adapted to exploitation of the trade-offs promised by a Phillips curve.  Section 6 contends that money remains at the heart of any serious conceptual framework for discussing the powers of a central bank.  An appendix provides a more formal quantity theoretic framework using the New Keynesian model.

Keywords. Pandemic bulge, Money cause, High inflation.

JEL. C71, H56, D74, J51, J52, D39.
https://doi.org/10.1453/ter.v8i4.2277
PDF

References

Aoki, K. (2001). Optimal monetary policy responses to relative-price changes, Journal of Monetary Economics, 48(1), 55-80. doi. 10.1016/S0304-3932(01)00069-1

Barsky, R.B., Justiniano, A., & Melosi, L. (2014). The natural rate of interest and its usefulness for monetary policy, American Economic Review: Papers and Proceedings, 104, 37-43. doi. 10.1257/aer.104.5.37

Blanchard, O., & Gali, J. (2007). Real wage rigidities and the new Keynesian model, Journal of Money, Credit, and Banking, 39(s1), 35-65. doi. 10.1111/j.1538-4616.2007.00015.x

Board of Governors, (2021). FOMC Statement for the March 17. meeting.

Brainard, L. (2021). Remaining patient as the outlook brightens, Speech at the National Association for Business Economics Virtual 377th Annual Economic Policy Conference, March 23.

Burns, A.F. (1979). The Anguish of Central Banking. Belgrade, Yugoslavia, Per Jacobsson Foundation.

Campbell, J.R., Evans, C.L., Fisher, D.M., & Justiniano, A. (2012). Macroeconomic effects of federal reserve forward guidance, Brookings Papers on Economic Activity, (Spring 2012), 1-80. [Retrieved from].

Friedman, M. (1969). The role of monetary policy (1968), in M. Friedman, (ed.), The Optimum Quantity of Money, (pp.95-110), Chicago: Aldine.

Friedman, M. (1984). Monetary policy for the 1980s, in J.H. Moore (ed.), To Promote Prosperity: U.S. Domestic Policy in the mid-1980s, (pp.23-60), Stanford: Hoover Institution Press.

Friedman, M. (1989). The quantity theory of Money, in J. Eatwell, M. Milgate, & P. Newman, (eds.), The New Palgrave Money, (pp.1-40), New York: W.W. Norton.

Goodfriend, M., & King, R.G. (1997). The New Neoclassical Synthesis, Macroeconomics Annual, B.S. Bernanke & J. Rotemberg (esd), NBER. [Retrieved from].

Hetzel, R.L. (2008). The Monetary Policy of the Federal Reserve: A History. Cambridge: Cambridge University Press.

Hetzel, R.L. (2012). The Great Recession: Market Failure or Policy Failure? Cambridge: Cambridge University Press.

Hetzel, R.L. (2021). The Evolution of Monetary Policy from the Founding of the Fed through 2020: A Narrative and Intellectual History,

Lerner, A.P. (1943). Functional finance and the federal debt, Social Research, The Johns Hopkins University Press 10(1), 38-51.

LHM, (2020). Monetary Policy Analytics, “Helicopter Jay: Fiscally Think Big(ly).” March 19, 2020.

Modigliani, F., & Papademos, L. (1975). Targets for monetary policy in the coming year, Brookings Papers on Economic Activity, 1(1975), 141-63.

Orphanides, A. (2003). The quest for prosperity without inflation, Journal of Monetary Economics, 50(1), 633-63.

Peifer, K. (2021). As restaurants across Richmond reopen, a new crisis is emerging staffing, Richmond Times Dispatch, April 9.

Pelosi, N. (2020). Dear colleague on latest progress on coronavirus response, Press release, March 17.

Phillips, A.W. (1958). The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861-1957, Economica, 25(100), 283-300. doi. 10.1111/j.1468-0335.1958.tb00003.x

Powell, J.H. (2021). Transcript: Jerome Powell interview Hosted by Princeton, WSJPRO Central Banking, January 14.

Powell, J.H. (2021). Getting back to a strong labor market, Remarks by J.H. Powell at The Economic Club of New York, February 10.

Samuelson, P., & Solow, R. (1966). Analytical aspects of anti-inflation policy (1960), in J. Stiglitz, (ed.), The Collected Scientific Papers of Paul A. Samuelson. 2(102), 1336-1353.

Stiglitz, J. (1997). Reflections on the natural rate hypothesis, Journal of Economic Perspectives, 11(1),3-10. doi. 10.1257/jep.11.1.3

Thornton, D.L. (2018). Comment on Alan S. Blinder, Wall Street Journal, May 4, A15.

Thornton, H. (1939). An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802) and Two Speeches (1811), edited with an Introduction by F. A. v. Hayek. NY: Rinehart and Co.

Tobin, J. (1982), Stabilization policy ten years after, Brookings Papers on Economic Activity (1:1980), 19-89. doi. 10.2307/2534285

Viner, J. (1950). Full employment at whatever cost, Quarterly Journal of Economics, 64(3), 385-407. doi. 10.2307/1884557

Creative Commons License
This article licensed under Creative Commons Attribution-NonCommercial license (4.0)

Downloads

Download data is not yet available.