July 28, 2010 Reading Time: < 1 minute

“In a recent article in this journal, Giffin, Macomber, and Berry (1981), hereafter referred to as GMB, attempt to test the hypothesis that larger deficits cause increases in the money supply and hence inflation. To test the debt monetization hypothesis, they analyze U.S. data for the period 1959-79. Finding no evidence that debt monetization causes inflation, they “suggest…investigation of some post Keynsian approaches, e.g., administered pricing or cost-push analysis, as a more fruitful attempt to explain recent inflation” (p. 67). In this paper we show that the GMB test of the debt monetization explanation of inflation is meaningless. Furthermore, we show that the correlation between prices and either publid debt outstanding or debt held by the Fed is statistically significant. While these correlations do not prove the debt monetization explanation of inflation, they nonetheless show that the hypothesis cannot be so easily dismissed.” Read more.

“Inflation and Deficit Spending Revisited”
Myles S. Wallace and John T. Warner
Journal of Post Keynesian Economics, Vol. 5, No. 1 (Autumn, 1982), pp 135-139

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