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Monetary arithmetic and inflation risk

23 days ago   |   By Bruegel

Fiscal and monetary policy responses to the 2007-2009 global financial crisis and the 2020-2021 COVID-19 crisis led to rapid increases in public debt and central bank balance sheets in most advanced economies. However, inflation remained at record-low levels until early 2021. At first glance, this looks like an invalidation of the identities that describe the relationship between money supply and inflation. This entails the risk of over-optimism: downplaying inflation risks in economic policy debates could have negative macroeconomic consequences. In fact, the monetary arithmetic has not...
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