This is “End-of-Chapter Material”, section 11.6 from the book Theory and Applications of Macroeconomics (v. 1.0).
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We have studied some severe and extreme cases of inflation to reveal the sources of rapid price increases. The quantity equation and the data both clearly indicate that inflation is linked to money supply growth. During periods of rapid inflation, the money supply is growing as well. The velocity of money also increases in times of rapid inflation, reflecting the collapse of confidence in the monetary system.
Money supply growth, in turn, comes about because money creation can help finance government budget deficits. Instead of using taxes to finance government spending, governments just print money. This increases prices and thus acts like a tax on those holding money and other nominal assets. Like all taxes, the inflation tax is distortionary. Used in moderation, there is an argument for using this tax along with others. But for some countries in some time periods, the use of the inflation tax has been excessive and there have been very costly hyperinflations.
The way to avoid excessive inflation is to create fiscal balance and monetary discipline. The big inflations between World War I and World War II ended when fiscal balance was restored. Monetary discipline comes in many forms. It requires an independent central bank, immune from political pressures. It may also require a central bank focused on an inflation target, paying less attention to other macroeconomic issues.