Central Bank Money Creation and Inflation

From: M
Sent: Wednesday, October 24, 2018 10:10 AM
To: wblock@loyno.edu
Subject: A question re. central banking

Dear Mr. Block

Thanks again for helping me out this past Aug. re the relationship between central bank money creation/interest rate adjusting- on the one hand- and production on the other. The person w/whom I am going back-n-forth with (on mises.org.) has now referenced the fact that QE (by the Fed) has, in the past 10 yrs. been the trillions of dollars yet in that same time span, inflation has increased by only 1.8% thereby disputing any “one to one” relationship between central bank behavior and inflation.

As always, I would very much appreciate your input/reaction. Thanks again. M

Dear M:

Only the crude quantity theory of money posits a one to one relationship between increases in the stock of money in price increases. There are many slips between this cup and this lip. For example, expectations. If people expect higher prices, they will buy more now, and then prices will rise faster than the quantity of money increases. If people expect lower prices, they will buy less now, and then prices will rise slower than the quantity of money increase. Ditto for decreases in the quantity of money.

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4:15 pm on March 8, 2019