Inflation, unemployment and the Central Bank: Themes for a critical reappraisal

Abstract

Two propositions are discussed, the first to be attributed to the monetarists (“the variations of the monetary base determine those of prices”), the second to certain Keynesian economists (“the variations of prices ultimately depend on the rate of unemployment”). The author argues that both propositions are wrong. As for the former, it is maintained that inflationary impulses do not originate from the quantity of money but from the activity of firms, which, however, can be influenced by the policy of the central bank. As for the latter, the rate of unemployment appears to be only one of several variables affecting the behaviour of wages and prices. A critical reappraisal of the explanation of inflation is now particularly important since the European Central Bank will become operative at the beginning of the next year.

Keywords

• Inflation
• Money supply
• Monetary policy Prices