Inflation: Causes and Cures

In Chapter 9, Section 9.4, we defined inflation as a process of continually rising prices, and outlined how it can be measured. In addition we discussed the economic, social and political costs associated with inflation. You will recall that the main costs of inflation arise when inflation is imperfectly anticipated. The purpose of this chapter is to examine the debate over the causes of, and cures for, inflation. This debate can be conveniently divided into two main explanations of inflation involving monetarist and non-monetarist views. We begin our discussion with the monetarist explanation, which embodies two of the most famous relationships that exist in macroeconomics: the quantity theory of money, and the (expectations-augmented) Phillips curve.