Hacker News new | ask | show | jobs
by Symmetry 4037 days ago
Yes and no. The quantity of money governs the price level in the long run but people's expectations about inflation are very important in the short run. Volker showed that you can simply slow down the creation of money to bring inflation under control at the cost of a certain amount of short term economic distress.

What was cool about the Real story is that they mostly managed to stop inflation without the normal period of distress. This was super important because I believe the Brazilian central bank doesn't have the Fed's level of independence and probably wouldn't have been able to do it the hard way without being stopped.
1 comments
kaonashi 4037 days ago
> The quantity of money governs the price level in the long run

The quantity of money is both nebulously defined, and also has absolutely nothing to do w/ price level; it's all spending relative to output capacity.

link
sergiosgc 4036 days ago
A reduction to the absurd reveals that the quantity of money is relevant to the price level. Try to run the economy with one dollar changing hands and, since it can't change hands fast enough, that single dollar is priceless. Try having an absurd (approach infinity) number of dollars and, even if circulation speed is near zero, dollars will have near zero value.

Naturally, it is monetary mass coupled with circulation speed. If you change the monetary mass and no other economic variable, within the tolerance envelope, circulation speed will adapt and price levels won't budge. Exceed tolerance levels, and you will influence price levels.

You saw this applied in practice recently. Quantitative easing is a correction using monetary mass to an abnormal reduction in circulation speed (via reduced lending).

link
kaonashi 4036 days ago
>Try having an absurd (approach infinity) number of dollars and, even if circulation speed is near zero, dollars will have near zero value.

That only matters if those dollars are being spent and remain in the flow of funds. Say the Treasury printed a few trillion dollar notes and buried them in a hole, it's not going to affect the price level any (aside from the real resources used).

link
AnimalMuppet 4036 days ago
Don't forget velocity (unless you include that in "quantity" of money).
link