Endogenous Financing and the Long Run Impact of Money Growth on Output and Prices

Most monetary models make use of the quantity theory of money along with a Phillips curve. This implies a strong correlation between money growth and output in the short run (with little or no correlation between money and prices) and a strong long run correlation between money growth and inflation and inflation (with little or no correlation between money growth and output). The empirical evidence between money and inflation is very robust, but the long run money/output relationship is ambiguous at best. This paper attempts to explain The Federal Reserve System was established by congress in 1913 to provide the country with a safer, more flexible and more stable monetary system. While traditionally, the Federal Reserve’s first priority has always been a low, stable inflation rate, maintaining a steady rate of economic growth has never been far behind.