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We recently came across an interesting paper on inflation written by Lyn Alden. In the first part of this article, we will review some of her findings, and in the second part, we will consider potential medium-term consequences.
Generally speaking, there are two causes for money supply to go up quickly. On the one hand, banks can increase lending that creates deposits and expands the money multiplier. On the other hand, governments can run large fiscal deficits financed by central banks and commercial banks.
Money supply as such is not necessarily a reason for inflation but if it occurs alongside resource scarcity or supply chain limitations, a general rise in prices could be the result. It means that at the same time money velocity must rise or at least not fall.