Price indices, monetary analysis, and inflation : a macro-theoretical investigation

This thesis investigates inflation from a macro-theoretical point of view. It originates in a critical appraisal of traditional inflation analysis, where the latter phenomenon is identified with an ongoing increase in the level of aggregate prices because 'too much money is chasing too few goods'. It argues that the prevalent idea of money and output being two separate and autonomous objects can neither explain the value of money nor its variations over time. It also argues that output as a whole cannot be measured in this widely-shared analytical framework. A new theory is called for. The problem of inflation in the alternative framework developed in the thesis reveals its essentially macroeconomic nature. It is argued that to gain an understanding of inflation it is necessary to focus analysis on the formation of national income and not on its distribution. Within the proposed new framework, the production process is investigated in terms of tlows, rather than in terms of slocks changing hands in the process of output circulation; both money and banking are instrumental in generating, and measuring, macroeconomic magnitudes. Elaboration of the role of money and banking in this analytical framework provides a number of theoretical propositions that lead to the conclusion that the origin of inflation is 'monetary' and 'structural' rather than 'real' and 'behavioural'. The monetary-structural element is the design of the payment system; when this system is redesigned to recognise the macroeconomic relationship existing between bank money and production, inflationary pressures are at least revealed and may be eliminated. This thesis seeks to contribute to such a conceptual design.