# Inflation, Monetarism and Keynesianism

Is there a strict division between the Keynesianism and Monetarism on the view of inflation. In other words, does the push and pull inflation only belong within a Keynesian framework and does inflation defined in term of balance between monetary base and supply of goods and services only belong within the Monetarism.

Alot of presentations of inflation are self contradictory to me and I thought this might be why. I.e that there is indeed two definitions of inflation not having anything to do with each other originally.

In particular I find it hard to distinguish between "An increase in the money supply" and "An increase in the aggregate demand for goods and services"

The demand is governed by the existing amount of money in my opinion, i.e demand pull become secondary or a consequence of increase in money supply. Hence the "definition" of inflation as "increase in prices" seams to include two things of which we cant decide what is what.

Increase in money supply $\rightarrow$ demand pull $\rightarrow$ prices up.

Increase in money supply $\rightarrow$ prices up.

demand pull $\rightarrow$ prices up. (without increase in money)

The last implication donst make sense.

• Well lets look at an edge case where the money supply is increased by a factor of 10,000. I bet both camps would see this as inflationary although they might come to different estimates of the change in the price level. At a very small change in the money supply, the push/pull probably gives a better estimate. So you probably end up in different regimes depending on what the change is. – zeta-band Jul 23 '18 at 19:08
• @zeta-band right, but I am asking about the origin of the idea and defintions. – user1 Jul 24 '18 at 5:15

I thick you should return to some book about history of economic theories usch as "Modern Macroeconomics: Its Origins, Development and Current State" . Center of focus in Keynesianism/Monetarism debates was about the power of monetary/fiscal policy for combating recession.

Monetarists won and showed that monetary policy is effective at least when there is no ground for liquidity trap. Monetarists also believe that "transmission mechanisms" of monetary policy are more much broader than what Keynesian interest rate-investment mechanism ascertains. thus Monetarists as well as Keynesians accept that printing money will increase aggregate demand but through much more broader channels.

I should say that distinction between demand-pull inflation and cost-push inflation is a little tricky, because in real world (rather than in our DSGE models which are designed based on equilibrium paradigm) when central bank prints money excessively, demand increment in different markets will take place in a gradual manner and inflation transmits from one market to other markets step by step. According to this fact, one who just observe the input price increment in some markets, may think that there should be a cost-push inflation.

Pure cost-push inflations are mainly rooted in real shocks (namely supply shocks) rather than nominal shocks (namely demand shocks). For example droughts, wars and oil price shocks can make pure cost-push inflation.

Finally I should say that monetary policy may be able to dampen nominal (demand) shocks, but there are some economists who argue that monetary policy should not harshly respond to supply shocks . Unfortunately in real world central banks hardly can find out whether a price increment is due to supply shocks or demand shocks.

Monetary policy is much more complicated than what Taylor Rule suggests.

• Oh ok, and as far as you know they had the same definition and idea or inflation? – user1 Jul 24 '18 at 13:30
• Maybe I should say yes. I should add that Keynesians necessarily do not think as Keynes himself might think.As far as I know after that Keynes died, an extreme interpretation of Keynes prevailed which insisted on expansionary fiscal and even monetary policy to keep economy on full employment path. This extreme interpretation was at the root of 1960s-early 1970s inflations but finally defeated by monetarists. For an interesting paper in this regard see THE ROLE OF MONETARY POLICY – Ali Jul 24 '18 at 13:52
• Thanks, one last question. So their and "the" defintion of inflation is "a rise in price levels" and nothings else? And there dosnt exist any other definition then that? I seen some sourse talking about an incrase in the money supply being the definition of inflation, but is this more of a cause with disputed effect? – user1 Jul 28 '18 at 6:58
• Please let me know where you have read this definition? It should be some thing related to Austrian Economists. – Ali Aug 4 '18 at 10:07
• en.wikipedia.org/wiki/Inflation#Related_definitions – user1 Aug 5 '18 at 6:28