Money supply and inflation relationship pdf viewer

money supply and inflation relationship pdf viewer

Then, analysis of money supply and inflation also related to impacting factors such as . money supply to inflation. The results support the monetarist' view that argues that a one-way relationship between growth of money supply to inflation. .. pgpdf. ABSTRACT: There is a significant relation between inflation, which is known relationship between money supply and inflation is evident in general terms, While some economists, majority of which are members of Keynesian view, argue. PDF | This study examines the impact of money supply on inflation in Ghana. The results showed a long-run positive relationship between money supply and inflation based on an Ordinary . However, the consensus view is that a long.

Inflation is typically a excessive growth of the money supply. In economics, broad measure, such as the overall increase in prices the money supply or money stock is the total amount or the increase in the cost of living in a country. This series, frequently referred to as M1 a person pays for goods, while Amadeo cited it is a narrower definition of money than M2.

M2 as when the prices of most goods and services includes M1 plus short-term time deposits in banks continue to creep upward.

The Impact of Money Supply on Inflation, A Case of Ghana | collins F ofori -

When this happens, the and hour money market funds. The most widely accepted school of thought on Monetary theory provides insight into how to craft inflation is that it is a monetary phenomenon; hence optimal monetary policy, this is referred to as either the reduction of inflation is largely the purview of being expansionary or contractionary, where an monetary policy.

This school of thought, based on the expansionary policy increases the total supply of quantity theory of money, posits that inflation is money in the economy more rapidly than usual, and determined solely by the change in the relative supply contractionary policy expands the money supply more of money and goods.

The economic and financial slowly than usual or even shrinks it Lipsey et al. However, money supply growth does not policy being implemented by the Central Bank of that necessarily cause inflation.

Views on which factors country. It is widely agreed that monetary policy can determine low to moderate rates of inflation are more contribute to sustainable growth by maintaining price varied. Low or moderate inflation may be attributed to stability.

However, the consensus view is that a long account price fluctuations when making everyday sustained period of inflation is caused by money decisions. Literature review of inflation.

The task of keeping the rate of inflation low and stable is usually given to monetary This section of the study reviews previous works that authorities.

Generally, these monetary authorities are are related to the subject matter; the impact of money the central banks that control monetary policy through supply on inflation.

money supply and inflation relationship pdf viewer

The monetarist theory of the setting of interest rates, through open market inflation that was proposed by Milton Friedman and operations, and through the setting of banking reserve other economists is discussed.

The structural theory requirements.

money supply and inflation relationship pdf viewer

The economy is a collection of millions of inflation that was propounded by some economists of individual consumers and firms interacting on a is also examined. Another theory of inflation which daily basis to determine which goods and services is the Keynesian theory is thoroughly discussed for would be produced, which firms would supply various the readers to appreciate the various efforts that have products, which consumers would take them home at been made in studying inflation.

The expansionary, the end of the day, and what prices would be paid for as well as the contractionary monetary policies that the many different products.

money supply and inflation relationship pdf viewer

The history of conscious and intensive efforts by successive monetary management in Ghana is further examined. The Studies on inflation and money supply within the period from — is classified as the first Ghanaian economy as well as the Granger-causality episode of inflationary situation in Ghana, which was test are elaborately examined in this section.

Almost all the factor to the inflationary process was deficit incurred industrial set-up and the infrastructure base of the on government accounts and which were financed country were financed by the state. The gradual but through borrowing from the domestic banking increasing inflation rate became serious during the system. This assertion confirms the monetarist period towhich is the second episode of hypothesis. She also stated that inflation was further inflation in Ghana.

Within this period, the various strengthened by the shortage of essential consumer military leaders who came into power pursued goods and restrictions of imports which have abort as expansionary economic management, which led to a result of structural rigidities in the country. The huge Balance of Payment BoP deficits. Ahmad also noted that increases in money supply and the subsequent effects excessive monetary expansion arising from on the economy through high general price levels. The concern with inflation emanates not only pressures.

In the short to medium term, high blamed this on increasing demand on agricultural inflation and persistent inflation undermines public production resulting from growth in population and confidence in the economy and in the management of urbanization.

This excess demand for food assessments of the prospects for future economic then influenced comprehensive price increases. Evidently in price movements in the country. For instance, inflation in Ghana is caused by both fiscal and non- conclusions from the works of Lawson, Ahmed, monetary factors.

According cause of inflation in Ghana. Benanke et al, The Development of the Monetary Policy operation and Development OECD countries over a Frameworks in Ghana year period that growth rates of the money supply The history of monetary management in Ghana can and the general price level are highly correlated. Dwyer investigated the environment. Prior towhen major reforms in strength of money supply in predicting inflation the financial structure of the economy began, the using VAR on quarterly data from to The Bank of Ghana operated largely a direct controlled study concluded that real income growth, inflation or system of monetary management.

This entailed the both are related to money growth and that money reliance on predominantly direct intervention growth is more useful for forecasting inflation than instruments, prominent among which was direct other variables besides past inflation. This involved the imposition of Evidently inflation in Ghana is caused by both fiscal ceilings, both global and sectoral, on individual and non-monetary factors. With time these monetary policies. Excessive money supply is the arrangements proved to be ineffective and introduced single most pervasive cause of inflation in Ghana.

The direct control system of monetary mismanagement. Bemanke et al, A non- management had to be abandoned with the advent of monetary source of inflation is attributable to poor liberalization of the economy in This resulted in high food prices in the country.

The other largely on the use of indirect and market based dimension to inflationary trends is that inflation is instruments in the conduct of its monetary policy. This is because Ghana like the rest of This brought into focus a new dimension to the way the world is always affected by crude oil hikes, which monetary management was designed and affects the state of the economy.

money supply and inflation relationship pdf viewer

This has been a implemented. Inthe Bank of Ghana Law, Act major cause of civil strife which belies every military was passed by parliament. The Law gave the overthrown in the country. The independence aspect of the to the removal of the then government from office in law implied that the Bank could use whatever tools a military putsch in The then government available at its disposal in achieving its primary imposed fiscal and monetary discipline to curb it, but objective of price stability.

The law foresaw and The new government succeeded in curbing the Bank of Ghana to be an inflation-targeting central inflation down but again shot up during the bank. Real bills doctrine The real bills doctrine asserts that banks should issue their money in exchange for short-term real bills of adequate value. As long as banks only issue a dollar in exchange for assets worth at least a dollar, the issuing bank's assets will naturally move in step with its issuance of money, and the money will hold its value.

Should the bank fail to get or maintain assets of adequate value, then the bank's money will lose value, just as any financial security will lose value if its asset backing diminishes.

The real bills doctrine also known as the backing theory thus asserts that inflation results when money outruns its issuer's assets. The quantity theory of money, in contrast, claims that inflation results when money outruns the economy's production of goods. Currency and banking schools of economics argue the RBD, that banks should also be able to issue currency against bills of trading, which is "real bills" that they buy from merchants.

This theory was important in the 19th century in debates between "Banking" and "Currency" schools of monetary soundness, and in the formation of the Federal Reserve.

In the wake of the collapse of the international gold standard postand the move towards deficit financing of government, RBD has remained a minor topic, primarily of interest in limited contexts, such as currency boards. It is generally held in ill repute today, with Frederic Mishkina governor of the Federal Reserve going so far as to say it had been "completely discredited. In the 19th century the banking schools had greater influence in policy in the United States and Great Britain, while the currency schools had more influence "on the continent", that is in non-British countries, particularly in the Latin Monetary Union and the earlier Scandinavia monetary union.

General[ edit ] An increase in the general level of prices implies a decrease in the purchasing power of the currency. That is, when the general level of prices rise, each monetary unit buys fewer goods and services. The effect of inflation is not distributed evenly in the economy, and as a consequence there are hidden costs to some and benefits to others from this decrease in the purchasing power of money.

For example, with inflation, those segments in society which own physical assets, such as property, stock etc. Their ability to do so will depend on the degree to which their income is fixed. For example, increases in payments to workers and pensioners often lag behind inflation, and for some people income is fixed. Also, individuals or institutions with cash assets will experience a decline in the purchasing power of the cash. Increases in the price level inflation erode the real value of money the functional currency and other items with an underlying monetary nature.

Debtors who have debts with a fixed nominal rate of interest will see a reduction in the "real" interest rate as the inflation rate rises. The real interest on a loan is the nominal rate minus the inflation rate. Any unexpected increase in the inflation rate would decrease the real interest rate.

money supply and inflation relationship pdf viewer

Banks and other lenders adjust for this inflation risk either by including an inflation risk premium to fixed interest rate loans, or lending at an adjustable rate. Negative[ edit ] High or unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services to focus on profit and losses from currency inflation.

For instance, inflated earnings push taxpayers into higher income tax rates unless the tax brackets are indexed to inflation. With high inflation, purchasing power is redistributed from those on fixed nominal incomes, such as some pensioners whose pensions are not indexed to the price level, towards those with variable incomes whose earnings may better keep pace with the inflation.

Where fixed exchange rates are imposed, higher inflation in one economy than another will cause the first economy's exports to become more expensive and affect the balance of trade. There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation.

Cost-push inflation High inflation can prompt employees to demand rapid wage increases, to keep up with consumer prices. In the cost-push theory of inflation, rising wages in turn can help fuel inflation. In the case of collective bargaining, wage growth will be set as a function of inflationary expectations, which will be higher when inflation is high.

This can cause a wage spiral. Social unrest and revolts Inflation can lead to massive demonstrations and revolutions. For example, inflation and in particular food inflation is considered as one of the main reasons that caused the —11 Tunisian revolution [57] and the Egyptian revolution[58] according to many observers including Robert Zoellick[59] president of the World Bank. Hyperinflation If inflation becomes too high, it can cause people to severely curtail their use of the currency, leading to an acceleration in the inflation rate.

High and accelerating inflation grossly interferes with the normal workings of the economy, hurting its ability to supply goods. Hyperinflation can lead to the abandonment of the use of the country's currency for example as in North Korea leading to the adoption of an external currency dollarization.