From 2015 to 2018 the ECB increased the money supply by around 20% (around 6% y/y), with a GDP increase rate under 1%. Yet the inflation rate remained under 2%. A back-of-the-envelope calculation would expect a much larger inflation rate (around 5% or more). What happened?

UPDATE: here is my calculation: using a quantity of money model: $Y P = v M$ where $Y$ is the GDP, $P$ is the price level, $v$ is the money velocity and $M$ is the money supply, then the inflation (rate of variation of $P$) is the rate of variation of $M$ less the variation of $Y$, that is about 6% - 1% = 5%

  • $\begingroup$ I think you're assuming there was full employment in 2015, and I'd say that was not the case $\endgroup$
    – Patricio
    Jan 1, 2019 at 8:53
  • 1
    $\begingroup$ Could you share your back-of-the-envelope calculation with us? Your underlying assumptions are probably relevant to the answer. $\endgroup$
    – Giskard
    Jan 1, 2019 at 10:46
  • $\begingroup$ Patricio: in the period, the employment grew around 1% per year (comparable with the GDP growth, therefore, no big changes in productivity). That makes the puzzle stronger, since increments in employment are usually correlated with inflation increase (Phillips curve) $\endgroup$ Jan 2, 2019 at 20:03

2 Answers 2


Because commercial banks have used injected liquidities to consolidate their balance sheet instead of stimulating demands by creating credits (that did not previously exist when they make loans). This is called the money multiplier effect. The multiplier was somehow blocked (to ~$1$) because of their precaution behaviour, and so was the money velocity.

On March 10, 2016, the ECB has even considered the possibility of giving 200€ per month and per person to stimulate inflation. And this with the main idea of circumventing the commercial-bank system. This unconventional monetary policy is called monetary helicopter.

  • $\begingroup$ my own solution would be in that direction too. I was wondering if there was perhaps any alternative explanation. $\endgroup$ Jan 4, 2019 at 20:12
  • $\begingroup$ Any question @Stefano ? $\endgroup$
    – keepAlive
    Oct 17, 2019 at 11:34

To quote from this Wikipedia link...

a 10% increase in M could be accompanied by a change of 1/(1 + 10%) in V

If the model is true, it seems the velocity of money is not a constant. This is the answer.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.