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Money Supply and Inflation: A Historical Analysis

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  • Rajkumar A Waingade

Abstract

An analysis of the relationship between money supply and price level in the context of India reveals that, over a long period, there exists a positive correlation between growth in money supply and price level. The association between the two has however not been proportional. The growth in money supply has most of the time exceeded the growth in price level. The gap between the two has been explained by the growth in real national income. If the combined growth in price level and real national income over a long period is considered, then it comes very close to the growth in money supply, implying a near proportional relationship between the two. This means the impact of change in money supply gets distributed between the change in price level and change in real national income, depending upon the state of the economy. A poor state of the economy as implied by the poor real national income growth causes the price level to carry the major part of the impact of change in money supply. This appears to be true in the case of India. The discrepancy observed with regard to the growth in the broad measure of money supply (M3) and the combined growth in WPI inflation and real national income has been found to be the result of fall in income velocity of money for M3.

Suggested Citation

  • Rajkumar A Waingade, 2011. "Money Supply and Inflation: A Historical Analysis," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(1), pages 22-45, February.
    • Handle: RePEc:icf:icfjmo:v:09:y:2011:i:1:p:22-45
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    Cited by:

    1. Dekkiche Djamal, 2022. "Impact of Money Supply on Inflation Rate in Egypt: A VECM Approach," Economics and Business, Sciendo, vol. 36(1), pages 134-148, January.
    2. Qishui Chi, 2014. "The Impact of Money Supply on the Price: Evidence from China," Research in World Economy, Research in World Economy, Sciedu Press, vol. 5(1), pages 75-87, March.
    3. Ditimi Amassoma & Sunday Keji & Emma-Ebere Onyedikachi O., 2017. "The Upshot of Money Supply and Inflation in Nigeria," Valahian Journal of Economic Studies, Sciendo, vol. 8(2), pages 75-90, October.

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