Abstract

There have always been two types of explanations for inflation: ad hoc explanations and monetary explanations. Historically, the ad hoc explanations have been in terms of special factors present on particular occasions: commodity price increases due to bad harvests, supply disruptions due to restrictions on international trade, profiteers or monopolists holding back scarce goods, or trades unions pushing up wages leading to a wage-price spiral or cost-push pressures, and so on in great variety. Even the widely used aggregate demand-aggregate supply model is a species of ad hoc explanation in the sense that it relies on idiosyncratic factors driving estimates of the output gap or special factors affecting the supply of labor or productivity. The monetary explanations for inflation have focused on increases in the quantity of money: either new discoveries of gold and silver in centuries past, or fiat money creation by the banking system or by the central bank in modern times.