WHAT MONEY DOES
What Money Does
THE THREE FUNCTIONS OF MONEY
1. Medium of Exchange
Macroeconomics
In this video, I will describe what money does, meaning what functions money
provides to the economy. And, I will show how the services that money provides to the
economy impact output.
Money has three functions.
First, money serves as a medium of exchange. This means people use it to buy and
sell goods, services, and financial securities. A good way to appreciate the
importance of an effective medium of exchange is to imagine what happens when
there is not an effective medium of exchange. If money is not an effective medium of
exchange, people would be forced to barter, and that does not work very well.
For example, if I wanted a cup of coffee and a snack, I could give part of this lecture
on inflation at a coffee shop in return for a large cup of coffee and a slice of cake. Or,
perhaps, I might only get a small cup of coffee and no cake if the barista at the coffee
shop is not very interested in macroeconomics. Without well-functioning money, I
might not get the coffee that I want and the people most interested in
macroeconomics might not get the information they seek.
THE THREE FUNCTIONS OF MONEY
2. Store of Value
Second, money also functions as a store of value. This means that we can hold
money to trade it for goods and services in the future. This is very convenient as it
means that we do not have to exchange money immediately after we sell goods and
services.
THE THREE FUNCTIONS OF MONEY
3. Unit of Account
Three, money functions as a unit of account, meaning that money provides the terms
in which people quote prices and record debts.
If I ask you about the value of something, you are likely to respond in terms of its U.S.
dollar value. Just as we might think about temperature in terms of Celsius or
Fahrenheit, people tend to think about value in terms of a specific unit of account.
This illustrates that in many contexts, money as a unit of account is deeply ingrained
in how we conceptualize the value of goods, services, and jobs.
HOW MONEY INFLUENCES POTENTIAL OUTPUT
Well-Functioning Money
1. Facilitates specialization and enhances productivity (A)
Macroeconomics
How does money influence potential output?
First, when money functions well—when money serves as an effective medium of
exchange, store of value, and unit of account—money facilitates specialization.
For example, when money functions well, I can really focus on becoming the best
macroeconomist that I can be! Then, I can sell that expertise to others for money and
use that money to make purchases. I do not have to worry about growing my own
food; I can specialize in macroeconomics. Others can specialize in growing food and
being the best farmers that they can be.
With well-functioning money, the economy gets better macroeconomic expertise and
food. This is crucial. An effective medium of exchange facilitates specialization and
specialization enhances productivity. Putting this view of what money does in the
context of our Solow Growth Model, the economy gets more and better output with
the same inputs, meaning “A” increases and potential output increases.
HOW MONEY INFLUENCES POTENTIAL OUTPUT
Well-Functioning Money
2. Reduces uncertainty, which enhances efficiency (A)
Second, when money functions well, it reduces uncertainty and facilitates business
deals, with positive repercussions on efficiency and output. This is very closely related
to the first point of how money influences output.
For example, consider the following business deal. I lend you $1,000 now for you to
produce pens. You promise to give me $2,000 in two years. This deal is going to be
less risky—and presumably more likely to happen—if we are more certain about the
purchasing power of those dollars. Since you have to pay me $2,000 in two years, you
want to have a good sense of how many pens you need to sell to be able to pay me
back. Since I am going to get $2,000 in two years, I want to know how much stuff I
can buy when you pay me back. If money is a sound store of value and an accepted
medium of exchange, this will reduce our uncertainty and facilitate the deal. With
well-functioning money, you can produce your fantastic pens and the economy will
operate more efficiently. If money does not function well, the deal is less likely to
happen and those great pens might not get produced.
HOW MONEY INFLUENCES POTENTIAL OUTPUT
Well-Functioning Money
3. Can also encourage savings (s), which also affect potential output
Third, when money functions well, it can encourage savings.
If we are confident about the future purchasing power of money and it is easier to
make business deals, this can increase our willingness to forgo consumption, save,
and boost the economy’s capital stock. As we know from the Solow model, such an
increase in the savings rate will increase potential output.
HOW MONEY INFLUENCES POTENTIAL OUTPUT
Solow Growth Model
y
y0=A0f(k)
(δ+n)k
y0
sy0=sA0f(k)
k0
Steady-state level of
output per capita (y0)
and capital per capita
(k0)
k
We can illustrate the importance of well-functioning money using the tried and true
Solow Growth Model.
As shown, let’s start from an economy where money does not function very well and
where the economy has converged to its steady state level of output per person. This
is indicated with y0.
HOW MONEY INFLUENCES POTENTIAL OUTPUT
Solow Growth Model
y
y=A1f(k)
y1
(δ+n)k
y0
y=A0f(k)
With well-functioning money,
people can specialize and
become more productive:
sA1f(k)
■
sA0f(k)
k0
k1
k
This increases A0 to A1.
The economy can now
produce more output with the
same inputs because
efficiency increased.
Now, let’s introduce well-functioning money.
Well-functioning money makes it easier for individuals to specialize and become more
productive at their jobs and it makes it easier for businesses to make productive
deals.
We illustrate this improvement in productivity as an increase in A from A0 to A1. This
shifts the production function up, meaning more can be produced with the same
inputs.
As shown, the economy converges to a new, higher level of steady state output per
worker, which we designate as y1.
THE THREE
FUNCTIONS OF MONEY
Medium of Exchange
Store of Value
Unit of Account
Bottom-line: Money functions as a medium of exchange, store of value, and unit of
account.
WELL-PERFORMING
MONEY
Productivity
Savings
Output
When it performs these functions well, money boosts productivity, savings, and
output.
HOW INFLATION SLOWS
GROWTH
How Inflation Slows Growth
INFLATION REDUCES PRODUCTIVITY
When money is functioning less
effectively, people:
■
Avoid holding money
■
Monitor/Change prices
■
Develop skills to avoid the
costs of inflation
In this video, I explain how inflation reduces potential output and slows economic
growth.
The primary way in which inflation influences potential output is by changing what
people do. At an intuitive level, think of yourself doing the best that you can at your
job.
Now, I start incessantly bothering you. You will be less productive. Inflation is like that.
It bothers everyone, reduces their productivity, and lowers potential output.
At a more concrete level, high inflation means prices are rising quickly and money is
losing value rapidly.
Money becomes a less effective store of value because it is losing value. To avoid this
bother—to avoid this loss in the purchasing power of money, people will spend more
time trying to not hold money; they spend more time on monitoring changes in prices;
they spend more time changing the prices of what they sell to keep pace with
inflation, and they spend more time developing skills to escape the losses associated
with money losing value. That is, people are incessantly bothered by inflation and this
makes them less productive.
Let’s keep going with this example. When economies have high inflation, many of the
brightest individuals are pulled into businesses that help other businesses and
individuals evade the economic costs from inflation. These bright, talented individuals
help others hedge inflation risk, invest overseas, and economize on cash balances. If
inflation were low, these bright, talented people would focus on boosting efficiency,
innovation, and output. We can describe all of this extra time and talent spent on
inflation-avoiding activities as unproductive because people would not waste their
time on these activities in the absence of inflation.
INFLATION REDUCES PRODUCTIVITY
Solow Growth Model
y
y0
(δ+n)k
y1
y=A0f(k)
Inflation reduces the efficient
functioning of money:
y=A1f(k)
■
People spend time on
avoiding the consequences
of inflation.
■
This reduces productivity (A).
■
Steady-state output per
worker falls.
sA0f(k)
sA1f(k)
k1
k0
k
We can illustrate the adverse impact of inflation on the economy using the Solow
Growth Model.
Inflation impedes the functioning of money. Money becomes a less secure store of
value and may even reduce its effectiveness as a medium of exchange and unit of
account. As a result, inflation changes what people do. They spend more time on
avoiding inflation and less time on improving the productive capabilities of the
economy. In other words, inflation lowers “A” from A0 to A1. As a result, potential
output falls from y sub-zero to y sub-one.
INFLATION REDUCES POTENTIAL OUTPUT
Uncertainty about prices:
■
Impedes longer-run business
deals and investments
■
Changes the quantity and
allocation of savings
■
Reduces efficiency (A)
■
May reduce savings too (s)
Another way that inflation reduces potential output is by increasing uncertainty.
The key issue is that high inflation goes hand-in-hand with greater uncertainty about
prices. In terms of mathematics, inflation and the volatility of inflation are extremely
highly correlated. This means that as inflation increases, it is not just that prices are
rising faster; it also means that there is greater risk about how fast prices are rising.
With all of the extra uncertainty, inflation makes it harder to complete business deals.
I am less likely to lend you $1,000 for a promise of $2,000 in two years if I do not know
how much stuff I can buy with that $2,000 in two years.
As a result, people might just buy and consume more stuff now rather than save and
make productive investments. In our Solow Model, this means that the greater
uncertainty about prices triggered by inflation reduces productivity, “A,” and perhaps
“s,” the savings rate, too—both of which work to reduce output.
INFLATION EXAMPLE:
ZIMBABWE
Inflation Example: Zimbabwe
ZIMBABWE
As an example of the impact of inflation on an economy, let’s consider Zimbabwe,
where there was a hyperinflation between 2007 and 2009. Yes, this is one country and
yes it happened long ago. But, it dramatically illustrates how inflation reduces the
functioning of money and hurts growth.
Just look at the denomination of this note! One hundred trillion dollars. This number
alone dramatically suggests that something went badly wrong.
HYPERINFLATION IN ZIMBABWE: 2007-2009
Zimbabwe consumer
price inflation soars amid
hyperinflationary period.
Source: International Monetary Fund’s International Financial Statistics Database; Reserve Bank of Zimbabwe Monthly Economic Reviews
Inflation was about 50% per month in March 2007. That is already extremely high. It
means that prices are more than doubling every other month. Think about that. At
50% inflation per month, the prices of everything that you buy are doubling every few
weeks. Then, things really went awry. Inflation exploded, rising so high that the
government stopped producing price statistics. At its peak, inflation was 98% per day.
Yes, prices were doubling each day.
In April 2009, Zimbabwe officially abandoned its own money and people used the U.S.
dollar and the Euro.
INFLATION CHANGES WHAT PEOPLE DO
1.
Change to “hard” currency; buy gold, jewelry, anything that would be a
reliable store of value.
Imagine that you are living under these conditions. What would you do? Really,
imagine prices are doubling every week, so that the purchasing power of the local
currency in your pocket and your bank account is falling by half each week. What
would you do?
First, you would want to do something with that currency in your pocket and in your
bank account besides keeping it in your pocket and the bank. You might buy foreign
currency; you might buy gold, silver, jewelry; you might buy almost anything that would
be a useful store of value.
INFLATION CHANGES WHAT PEOPLE DO
2.
If inflation is rapid enough, you might run out during the middle of work to
shop before prices rise.
■
You might demand to have your salary adjusted automatically to
inflation.
Grocery Store
Second, you would probably ask your boss to pay you during the day, so that you
could run out and get groceries before the prices rose; you would have to figure out a
way to have your pay linked to inflation, so that your salary did not diminish to
something worth nothing in a few weeks.
INFLATION CHANGES WHAT PEOPLE DO
3.
If you were the owner of a business, you might need to change prices
multiple times during the day.
If you were the owner of a business, you might need to change prices during the day,
as the prices of your supplies and workers rose. More of your time would be spent
managing problems associated with inflation, not managing production in your
business.
For everyone, many hours of each day would be spent on trying to avoid the ravages
of inflation, reducing productivity and welfare. There would be massive protests—and
there were massive protests in Zimbabwe—about inflation.
INFLATION CHANGES
WHAT PEOPLE DO
Government tries to limit price
increases, and then...
Supermarket shelves emptied because of price controls.
Photo credit: Eugene Baron
The government responded to the protests about inflation by legislating that there
would not be inflation. In other words, they prevented business from raising prices.
While this sounds good, it does not make much sense. Producers could not survive as
their own costs kept rising, since not all prices were fixed and the prices of imported
goods kept soaring in local Zimbabwean dollar terms. This quickly meant that stores
were empty.
INFLATION CHANGES
WHAT PEOPLE DO
People try to use the cash for
something else...
Signs such as this one appeared in Zimbabwe during its
hyperinflation episode.
Photo credit: Eugene Baron
While people used the essentially worthwhile Zimbabwean dollar in a manner that
they found useful, this use of the currency created other problems.
INFLATION CHANGES WHAT PEOPLE DO
Economic decline wipes out
53 years of income growth
in Zimbabwe.
Source: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.0, Center for International Comparisons of Production, Income and Prices
at the University of Pennsylvania, May 2011.
The economy collapsed, wiping out 53 years of economic growth. Well-functioning
money is really important for economic prosperity.
DEFLATION IS HARMFUL
TOO
Deflation is Harmful Too
DEFLATION HURTS DEBTORS
1.
Unexpected deflation increases real cost of debt and leads to inefficient
bankruptcies.
Pen
Co.
Deflation can be harmful to output too! Deflation is when prices fall. While deflation
does happen, sustained deflation over many years does not happen often. There are
two main ways through which deflation can hurt potential output.
First, unexpected deflation tends to increase the real cost of debt and lead to costly,
unnecessary bankruptcies.
Let’s consider an example to see how deflation raises the real cost of debt and
increases the probability of bankruptcies.
Consider a situation in which I lend you $1000 for capital investments in your pen
manufacturing firm and you promise to pay me back $2,000 in two years.
DEFLATION HURTS DEBTORS
1.
Unexpected deflation increases real cost of debt and leads to inefficient
bankruptcies.
X 1000 = $2000
$2
X 2000 = $2000
$1
If prices fall, need to sell more goods to
pay fixed interest payments and principal,
which can lead to bankruptcy
Let’s say that when I make this loan to you, you believe that the price of your pen will
sell for $2 per pen. So, you expect that you will need to sell 1,000 pens to pay me
back. Under those conditions, you think that this is a good deal. With the loan, you can
make capital improvements, and you can sell 1,000 pens in the future to raise the
money to pay me back.
Now let’s say there is deflation and prices fall by 50%. That is not a realistic deflation
figure, but it makes the math easy and the example punchy. Now, with deflation, the
price of the pen is $1, instead of the $2 per pen that you expected.
This means that you need to sell 2,000 pens to pay me back. You need to sell twice as
many pens to pay me back the $2,000 that you owe me. The real burden of the debt
has gone up and that extra burden could force you into bankruptcy.
DEFLATION IS HARMFUL
1.
Unexpected deflation increases real cost of debt and leads to inefficient
bankruptcies.
■ Even if deflation does not lead to bankruptcy, it can complicate
business deals and contracting.
Even if it does not send you into bankruptcy, such a loss may discourage you from
making additional investments, stymieing economic growth. And, if you default, then
workers will be fired and the firm will not operate as it goes through a lengthy,
inefficient bankruptcy process. I will not get paid back, which will hinder my ability to
finance capital investment in other promising firms. All of these effects from
unanticipated deflation will work to reduce potential output.
DEFLATION IS HARMFUL
1.
Unexpected deflation increases real cost of debt and leads to inefficient
bankruptcies.
■ Even if deflation does not lead to bankruptcy, it can complicate
business deals and contracting.
2.
Deflation leads people and firms to postpone capital expenditures in
sub-optimal, inefficient ways.
A second way that deflation can harm output is as follows. When firms expect prices
to drop, they may postpone capital expenditures. Thus, they might not make
investments at the most efficient times with respect to production because the firms
are not only worried about efficient production. They are strategizing about deflation
too. In NOT making the investment at the most productive time, this hurts
productivity; it reduces “A” in the Solow Model, and potential output falls.
DEFLATION IS HARMFUL
Solow Growth Model
y
y=A0f(k)
y0
y=A1f(k)
(δ+n)k
y1
sA0f(k)
sA1f(k)
k1
k0
k
This figure illustrates the impact of deflation on potential output in the Solow Model.
By messing-up what people do, deflation hurts productivity. More specifically, by
inducing people and firms to delay purchases in sub-optimal, inefficient ways, this
reduces productivity and efficiency—A in the Solow Model—and lowers output.
WHY DOES HIGH INFLATION
HAPPEN?
Why Does High Inflation Happen?
UNDERSTANDING
CAUSES OF INFLATION
Policy and Business Implications:
1.
Identify which policy reforms
are necessary to stop inflation
and increase potential output
2.
Make better investment
decisions
In this video, we address the question: why does high inflation happen? Since inflation
is bad for potential output, why do some countries choose to have high inflation
anyway?
Addressing this question has both policy and business implications. On policy
implications, by figuring out why inflation happens, we also identify what types of
policy reforms are necessary to stop it and increase potential output.
On business implications, by figuring out why inflation happens and which policies will
stop it, we can make better investment decisions. Since high inflation slows growth
and hurts business returns, we can make better investment decisions today if we
know whether a country’s policy reform will—or will not—end inflation and boost
returns.
THE QUANTITY THEORY OF MONEY
M x V = P x Y
M: Quantity of money
V: Velocity of circulation
P: Price level
Y: Output
A simple answer about the cause of inflation emerges from the quantity theory of
money. That simple answer is the following: rapid growth in the money supply tends
to produce a rapid increase in prices.
We need to spend a little time developing the quantity theory of money to see more
concretely how and under which conditions money growth causes inflation.
The quantity theory is based on the insight that people hold money to buy goods and
services. If we are in a monetary exchange economy, then all transactions involve
money. Every time somebody buys food, they exchange money for food. When people
buy education, they exchange money for education. In a monetary exchange
economy, there is no barter. People do not buy food by giving the grocer a lecture on
inflation, and people do not trade pens for computers.
THE QUANTITY THEORY OF MONEY
Equation 1: M x V = P x Y
1T
Food
ation
Educ
rs
pute
Com
1T
1T
….
l:
Tota llion
ri
t
1
2
M: Quantity of money
V: Velocity of circulation
P: Price level
Y: Output
P
GDP
This definition of a monetary exchange economy leads to equation number one,
which is the quantity theory of money.
The right hand side of equation 1 is the value of all of the goods and services traded
in our monetary exchange economy over a particular time period, say a year. You can
think of this in two ways. One, you can think of the right hand side as summing up the
value of all transactions involving food, education, pens, computers, and everything
else that is produced and sold in this economy during the year. So, you multiply the
price of food times the quantity of food, the price of computers times the quantity of
computers, etc. After you get done summing up everything, that is the right hand side
of the quantity equation. The right hand side equals nominal GDP as long as
everything that is bought and sold is bought and sold with money.
The other way that you can think of the right-hand-side of equation 1 is slightly more
abstract but fully consistent with the Solow Model. You can think of there being one
good—the GDP good, Y—and it has a price, P, the GDP deflator. Then, the value of all of
the stuff traded in this monetary exchange economy is simply the price of the good, P,
times the amount of the GDP good traded, Y. This abstraction is what we used in the
Solow model, where there is just one output, Y. So, this second way of thinking about
the right-hand-side of equation 1 might be very familiar.
Whichever way you think about it, the right-hand-side is the value of everything traded
in the economy. For this example, we can use the U.S. dollar as the unit of account
that defines the value of the stuff that is traded in this economy.
THE QUANTITY THEORY OF MONEY
Equation 1: M x V = P x Y
Economy 1:
M: Quantity of money
V: Velocity of circulation
P: Price level
Y: Output
Economy 2:
The left-hand-side of equation simply says that in a monetary exchange economy,
each transaction involves money. The left-hand-side, represents the money part of
each transaction and the right-hand-side represents the goods or services part of
each transaction. Every transaction involves a trade of money for goods or services;
therefore the left-hand-side equals the right-hand-side.
Let’s be more specific about the left-hand-side. The left-hand-side equals the stock of
money in the economy times the number of times that the average dollar is used in
transactions.
This velocity term can be confusing, but it simply captures the following intuition.
Think of two economies in which exactly the same amount of stuff is traded. In one
economy there are lots of dollar bills. In the second economy, there are fewer dollars
than the first economy. So, in the first economy with lots of dollars, each dollar is, on
average, involved in fewer transactions than the second economy where there are
fewer dollars. In the first economy which has more dollars but the same number of
transactions as the second economy, more dollars are just hanging around and not
involved in many transactions. Thus, economists use the term velocity to
communicate how often the average dollar is used in a transaction.
THE QUANTITY THEORY OF MONEY
Equation 1: M x V = P x Y
Economy 1:
M: Quantity of money
V: Velocity of circulation
P: Price level
Y: Output
Economy 2:
Returning to equation 1, what we are saying is that if the right-hand-side is constant in
the two economies, so that PY is the same, then, the first economy has lots of M, but
each dollar is used less so the economy has smaller V.
THE QUANTITY THEORY OF MONEY
Equation 1: M x V = P x Y
Economy 1:
M: Quantity of money
V: Velocity of circulation
P: Price level
Y: Output
Economy 2:
The second economy has less M, so each dollar is used in more transactions,
meaning V is larger.
THE QUANTITY THEORY OF MONEY
0
0
Equation 2: gM + gV ≡ gP + gY
M: Quantity of money
V: Velocity of circulation
P: Price level
Y: Output
■ If V and Y are constant, then money growth gM translates
directly into inflation (gP).
With a little manipulation, we can also write the quantity theory of money in terms of
growth rates. The quantity theory, which is depicted again in equation 1, has the level
money, the level of velocity, the level of prices, and the level of output.
The growth rate version of the quantity theory has the growth rate of money—which is
gM, the growth rate of velocity—which is gV, the growth rate of prices—which is
inflation and is given by gP, and the growth rate of output—which is gY. Equation 2 is
very useful. It shows that if the growth rate of velocity and the growth rate of output
are zero, then money growth translates directly into inflation.
2007-2016 AVERAGE MONEY SUPPLY GROWTH AND INFLATION
(123 COUNTRIES)
Source: Mankiw, N. G. (2019). Macroeconomics (10th ed.). Macmillan Learning.
This graph documents the relation between the inflation rate and money growth for
many countries. There is one green square per country. The vertical axis measures the
average annual inflation rate of the country over the period from 2007 through 2016.
The horizontal axis measures the average annual growth rate of money over the same
period. If velocity and output growth were constant, then all of these green points
would fall along a line where inflation equals money growth.
We see that money growth and inflation are positively related. Indeed, the correlation
is 70%. This suggests that inflation and money growth move closely together.
Critically, we do not observe very high inflation rates without very fast money growth
rates. This suggests that one of the major reasons that countries have very high
inflation rates is that they choose very high money growth rates.
Of course, inflation and money growth are not perfectly correlated. This tells us that
countries experience growth in real output and velocity.
WHY DOES HIGH INFLATION HAPPEN?
Governments use central banks to print
money so they can spend more than
they are willing or able to tax or borrow.
Governments finance spending with:
Taxes
Borrowing (future taxes or
money printing)
Central Bank
Printing money
(Seigniorage)
The quantity theory offers a simple answer to the question: Why do some countries
have high inflation? The answer is they choose rapid money growth rates.
This answer is a bit unsatisfying because it leads to another question: Why do some
countries choose rapid money growth rates that in turn lead to high inflation?
A more fundamental answer to the question of what causes high inflation is that
governments use central banks to print money so that governments can buy stuff.
When governments spend more than they are willing or able to tax or borrow and the
central bank prints up money to fill that gap, this leads to rapid money growth and
inflation.
Let’s go through that step-by-step. Governments can finance spending in three ways:
First, they can tax the public directly. These taxes might include income taxes, real
estate taxes, corporate taxes, sales taxes, etc. There are many forms of taxation.
A second way that governments can finance spending is by borrowing. So,
governments can sell bonds to the public and use the proceeds from those bond
sales to buy stuff, whether it is roads and bridges, tanks and jets, or payments for
schools and education. When governments borrow to pay for current expenditures,
they will then have to raise revenues in the future to pay back those bonds.
A third way that governments can finance spending is by printing money. They have
central banks print the money to pay for the roads and bridges, tanks and jets, and
schools. When governments finance their spending by printing money, this is called
seigniorage. Thus, rapidly creating money to pay for government expenditures can
lead to inflation as noted by the quantity theory.
Thus, at a more fundamental level, it is not the printing of money that causes inflation;
it is the political forces that cause a government to spend more than it is willing or
able to tax or borrow and that therefore spur the central bank to print lots of money.
These analyses lead to insights about addressing high inflation and these insights are
relevant for investors.
HOW TO ADDRESS HIGH
INFLATION?
A Simple Answer:
■
Stop printing so much money
More Fundamental Answer:
■
Address the fiscal pressures
that generate excessive
money growth
At a simple level, the way to address high inflation is to stop printing so much money.
Starting from this perspective, policymakers sometimes indicate that they plan to
address inflation by reducing the growth rate of the money supply. In many contexts,
central bankers will attempt to signal their commitment to slowing the growth rate of
money by adopting a new currency. This currency might have a different color and
size from the old currency and the new currency will definitely have pictures of
different distinguished presidents and leaders in order to signal the central bank’s
commitment to slower money growth and slower inflation.
Investors, however, might be wary of such promises.
Unless the policymakers address the underlying motivations for fast money growth,
promises of slower money growth, even if accompanied by a new currency, may only
lead to fleeting effects on inflation. Without getting at the fundamental causes of fast
money growth, slowing money growth might just be a temporary phenomenon that
does not lead to long-term price stability, higher output, and greater investment
returns.
From this more fundamental perspective, the only way to fix very high inflation in the
long-run and boost long-run potential output is to address the fiscal pressures that
generate excessive money growth.