Metrics for Assessing the Effect of Household Income and the Money Supply on Inflation

• Published in: Montenegrin journal of economics 2021-09, Vol.17 (4), p.147-154
• Main Author: Alexandrov, Dmitry
• Format: Article
• Language: English
• Subjects: Budget deficits; Central banks; Cost control; Economic growth; Elasticity; Expenditures; Family income; GDP; Gross Domestic Product; Households; Hypotheses; Inflation; Interest rates; Price level changes; Quality of life; Quantity theory of money; Standard of living
• ISSN: 1800-5845; 1800-6698
• DOI: 10.14254/1800-5845/2021.17-4.13

High inflation remains a key outstanding issue today. It is one of the central issues facing the national economy of just about any country around the world. Inflation is known to have a particularly negative effect on the economy of developing nations. Among the key effects of high inflation are slowing economic growth, declining real household income, growing socioeconomic inequality in society, growing poverty and social tension in the country, and declining living standards and quality of life. The two key theories on the causes of inflation in the economy - the quantity (monetary) and institutional theories of inflation - lack consensus over how household income and the money supply influence inflation. To help resolve this issue, the authors suggest using the following two metrics: a coefficient for the elasticity of inflation with respect to household income and a coefficient for the elasticity of inflation with respect to the money supply. The use of these two metrics can help forecast the dynamics of inflation, depending on the dynamics of household income and the money supply in the national economy. Thus, the subject of this study is special metrics for assessing the effect of household income and the money supply on inflation. The object of this study is to explore the dependence of inflation on household income and the money supply via the use of special coefficients for the elasticity of inflation with respect to household income and the money supply. The authors' hypothesis is that growth in household income and the money supply will influence inflation in different national economies differently. In rich and developed economies, quick growth in household income and the money supply (a high degree of monetization of the economy) will have a smaller effect on inflation than in poor and developing ones. In developing economies, due to a high elasticity of inflation with respect to household income and the money supply, the inflationary process is more precipitate and intense, with significant damage inflicted on the national economy as a result. The re-search carried out by the authors confirms this hypothesis. The aut-hors investigated the dependence of inflation on household income and the money supply using their coefficients for the elasticity of inflation with respect to household income and the money supply. Ba-sed on their calculations, the authors drew the following conclusion: in rich countries (i.e., nations with high and fast-growin