Monetary Inflation

Monetary inflation is a sustained increase in the money supply of a country. It usually results in price inflation, which is a rise in the general level of prices of goods and services. Originally the term "inflation" was used to refer only to monetary inflation, whereas in present usage it usually refers to price inflation.

There is general agreement among economists that there is a causal relationship between the supply and demand of money, and prices of goods and services measured in monetary terms, but there is no overall agreement about the exact mechanism and relationship between price inflation and monetary inflation. The system is complex and there is a great deal of argument on the issues involved, such as how to measure the monetary base, or how much factors like the velocity of money affect the relationship, and what the best monetary policy is. However, there is a general consensus on the importance and responsibility of central banks and monetary authorities in affecting inflation. Keynesian economists favor monetary policies that attempt to even out the ups and downs of the business cycle. Currently, most central banks follow such a rule, adjusting monetary policy in response to unemployment and inflation (see Taylor rule). Followers of the monetarist school advocate either inflation targeting or a constant growth rate of money supply, while Austrian economists advocate the return to free markets in money, which would entail free banking or a return to a 100 percent gold standard and the abolition of central banks.

Members of the Austrian School of economics make no such distinction, maintaining that monetary inflation is inflation.