Money Growth and Inflation: Does Fiscal Policy Matter?

The determinants of inflation have long interested both economists and central bankers. This interest has taken on renewed importance in light of a growing consensus that central banks should —first and foremost—pursue price stability. The roots of this argument date back to Milton Friedman’s famous dictum that “inflation is always and everywhere a monetary phenomenon.” Yet recently this view has come under attack. As figure 1 illustrates, there has been virtually no correlation between money growth and inflation since at least the early 1980s.