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Central bank balance sheet, money and inflation

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  • Reynard, Samuel

Abstract

Strong central banks’ balance sheet expansions in response to economic crises have been followed by different inflation paths. This paper shows that whether or not those expansions resulted in a substantial increase in inflation is function of the associated broad money expansion, which depends on whether the private sector was part of the money creation process as an intermediary to the central bank financing the government. Inflation can be explained by an equilibrium analysis based on the quantity theory of money. This analysis explains why inflation remained low after quantitative easing in the US following the global financial crisis, but has substantially and persistently increased after the Covid-19 pandemic.

Suggested Citation

  • Reynard, Samuel, 2023. "Central bank balance sheet, money and inflation," Economics Letters, Elsevier, vol. 224(C).
    • Handle: RePEc:eee:ecolet:v:224:y:2023:i:c:s0165176523000538
    DOI: 10.1016/j.econlet.2023.111028
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    References listed on IDEAS

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    1. Reynard, Samuel, 2007. "Maintaining low inflation: Money, interest rates, and policy stance," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1441-1471, July.
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    4. Lucas, Robert E., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 137-167, January.
    5. John Greenwood & Steve H. Hanke, 2021. "On Monetary Growth and Inflation in Leading Economies, 2021‐2022: Relative Prices and the Overall Price Level," Journal of Applied Corporate Finance, Morgan Stanley, vol. 33(4), pages 39-51, December.
    6. Michael D. Bordo, 2014. "The Federal Reserve's Role: Actions Before, During, and After the 2008 Panic the Historical Context of the Great Contraction," Book Chapters, in: Martin Neil Baily & John B. Taylor (ed.), Across the Great Divide: New Perspectives on the Financial Crisis, chapter 6, Hoover Institution, Stanford University.
    7. Greenwood, John & Hanke, Steve, 2021. "On Monetary Growth and Inflation in Leading Economies, 2021-2022:Relative Prices and the Overall Price Level," Studies in Applied Economics 198, The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.
    8. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, June.
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    Citations

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    Cited by:

    1. Michael D. Bordo & John V. Duca, 2023. "Broad Divisia Money and the Recovery of U.S. Nominal GDP from the COVID-19 Recession," Working Papers 319, Princeton University, Department of Economics, Center for Economic Policy Studies..
    2. Michael D. Bordo & John V. Duca, 2023. "Money Matters: Broad Divisia Money and the Recovery of Nominal GDP from the COVID-19 Recession," Working Papers 2306, Federal Reserve Bank of Dallas.
    3. Juan E. Castañeda & José Luis Cendejas, 2024. "Money Growth, Money Velocity and Inflation in the US, 1948–2021," Open Economies Review, Springer, vol. 35(5), pages 999-1014, November.

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    More about this item

    Keywords

    Central bank balance sheet; Inflation; Monetary aggregates; Quantitative easing;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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