Monetary Growth, Financial Structure, and Inflation

It is argued that a key question of the operation of monetary policy is its decomposition into a price effect and an output effect. Specifically, the
association between the easing of global monetary and liquidity conditions on the one hand, and the significant spurt in inflation, on the other, in recent
times is probed to conclude that across the world, there seems to be an association. The issues of monetary stability, price stability and financial stability are also intimately interlinked.

Economists have always been interested in monetary theory as one branch of economics that is closest to reality (Hicks 1967). However, perceptions have differed on the impact of money on the economy. Right up to the 1980s, monetary policy was almost synonymous with changes in the money supply. In the 1990s, however, widespread disillusion with monetary targeting set in, and emphasis shifted away from money supply to interest rates as the main instrument of monetary policy. The transmission of monetary impulses to the macroeconomy, viz, output, capacity utilisation, employment, and inflation, have been, over historical time, viewed through different lenses. It is in this context that this paper investigates the post-pandemic spurt in inflation and its association with the huge expansion in money supply, consequent to the policy of quantitative easing.

The focus of this paper is threefold. First, we take review of the link between monetary policy on the one hand, and growth and inflation on the other. Second, in light of the recent spurt in inflation, we look at its possible association with excess monetary growth globally. Third, we examine whether the transmission process is strongly influenced by the financial superstructure of an economy.