The notion that excessive money supply growth is the primary cause of inflation is by now so familiar as to be a virtual commonplace. Not so widely understood, however, is the monetarist reasoning underlying this view. Robert L. Hetzel contributes to this understanding by spelling out the assumptions underlying the monetarist theory of inflation in "A Monetarist Money Demand Function."
Most economists agree that the price level is determined by the interaction of the demand for and supply of money. Monetarists go a step further, holding that since changes in the demand for money are small relative to changes in money supply, most of the changes in the general price level are caused by money stock changes. In addition to demonstrating the logic underlying this view, Hetzel suggests a functional form that can be used to test the strength of the predicted relationship between money and inflation.
Our Research Focus: Monetary History