MONEY PRINTING AND INFLATION: FUNDAMENTALS AND CAUSAL RELATIONSHIPS

Abstract

Central Banks or monetary authorities are usually responsible for printing money, which means releasing new money to the economy. Such new money issued by the Central Bank is reflected by the changes in ‘reserve money’ stock of the Central Bank. Money printing process is entirely based on fundamental economic reasons and it is fundamentally different from the monetization of government budget deficits. Theoretically and empirically, there is a causal relationship between money and inflation as long-term underlying inflation is driven by the changes in money supply. This study focuses on the relationship between credit to government and inflation in a selected sample of countries, which is examined using descriptive and statistical techniques such as correlation analysis, co-integration analysis and causality tests. Accordingly, this study finds that a significant one-to-one relationship or causality between credit to government and inflation could not be observed although strong and robust relationships between money and inflation could be observed with considerable time lags. Hence, the study concludes that it is not accurate to establish one-to-one causal relationship between components of money supply like credit to government by the Central Bank and inflation.

Keywords: money printing, reserve money, credit to government, inflation

For full paper: fmscresearch@sjp.ac.lk