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The Essence of Inflation

WP 2022-04.

When the supply of money increases and the supply of goods remains the same, inflation occurs. Thus, inflation is a monetary phenomenon. We discuss the essence of inflation in detail. An increase in money supply also affects the price structure, thereby creating winners and losers. The induced redistribution possibilities represent incentives for policymakers to manipulate monetary, fiscal and regulatory conditions. However, citizens would benefit from the absence of credit and monetary manipulation. This explains why effective rules that limit discretionary monetary policy are relevant. We suggest that the market for central bankers should be opened to companies to foster competition and increase the credibility of stability-oriented monetary policy.

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