In The Purchasing Power of Money (1911), he developed the modern concept of the relationship between changes in the money supply and changes in general price levels.
If we look at the correlation between the changes in money and in credit on a monthly basis from 1985 to 2015, we find a coefficient of − 0.052.12 Open image in new window Fig. 1 M1 and total credit per GDP.
Others maintain that not enough is known about the relations between changes in the quantity of money and in prices and output to assure that a discretionary monetary policy will do good rather than harm.
The correlations observed by this so-called Chicago school between money supply and money income are attributed by their critics to variations in the demand for money to spend, which elicit partial responses from supply and are followed after an interval by corresponding changes in money income.
Pay attention to sudden changes in money-spending habits.
Since then, the relationship between real economic growth and changes in the money supply and Fed funds rate has virtually disappeared.
Monetary policy is on autopilot, with changes in base money determined solely by changes in the demand for base money.
Changes in domestic money-market rates resulting from central-bank actions also tend to change the prevailing relations between domestic and foreign money-market rates, and this, in turn, may set in motion short-term capital flows into or out of the country.
Faced with the proposition, drawn from the money model, that an increase in the money supply will also cause income to rise, he will ask how such a change in the money supply can cause a discrepancy between saving and investment when there was none to begin with.
This relationship between the flow of money and changes in prices is why central banks focus so intently on inflation.
