Extract A: Selected Data for the Republic of Valeska (2015–2022)

Extract B: The Transmission of Monetary Stimulus

When central banks engage in large-scale asset purchase programmes, they inject reserves directly into the banking sector. The goal is to lower long-term yields and stimulate commercial lending. However, the transmission of this liquidity into the real economy is not instantaneous. In times of heightened global uncertainty, commercial banks may opt to strengthen their balance sheets by holding substantial reserves at the central bank rather than expanding credit to households and businesses.

Once business confidence returns, this accumulated liquidity becomes active. Increased credit creation expands the purchasing power of the private sector, driving nominal consumption and investment upward. If aggregate demand rises faster than the structural capacity of the economy to produce goods and services, inflationary pressures inevitably build.

Extract C: The Classical Equation and Price Dynamics

Monetary economists argue that persistent inflation is always and everywhere a monetary phenomenon. Using the classical Equation of Exchange, they assert that in the long run, changes in the money supply have no permanent effect on real economic output, which is instead determined by supply-side factors like productivity and labour force growth.

Under this view, the velocity of money remains relatively stable because it is determined by long-term institutional arrangements. Therefore, any expansion in the money stock that exceeds the growth rate of real output must translate directly into a rise in the general price level. This transmission operates as households find themselves with excess cash balances, which they seek to spend, driving up aggregate demand against a fixed potential output.