Is Money Supply the Cause of Inflation in India? An Alternative Postulate to Understand Inflation
Abstract ‘Inflation is always a monetary phenomenon’ say some economists and policymakers and attempt to arrest rising inflation with policies aimed at reducing the money supply in the economy. The theory is true in countries which have reached the full employment level, but in developing and underdeveloped countries this may not always be true. Advanced countries facing severe recession try to bring about inflation by raising money supply, and other advanced countries with high inflation pressure are able to successfully curtail inflation by reducing money supply. However, the entire inflation dynamics playing out in developing economies are different and it's necessary to re-visit and re-examine the relevance of the belief that inflation is always a monetary phenomenon, especially with respect to developing economies. The present research paper attempts to test the validity of the quantity theory of money in Indian situation and provide an alternative postulate.