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Economic Research Institute Study paper


Utah State University

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Accelerating inflation in the late 1970s and early 1980s led to renewed interest in empirical testing the causes of inflation. Although several possible causes of inflation have been suggested, all can be broadly divided into two major categories. The first is the keynesian or structuralist explanation asserting that inflation is directly caused by real shocks in some sectors of the economy. These exogenous shocks can be due to many factors, such as global crop failures, increases in prices of raw material, and other factors of this nature. The real shocks lead to a contraction in output which in turn increases prices. The price increases are subsequently accommodated by an expansion in the money supply. According to this explanation, the stock of money is en dogenously determined. Causality is always assumed to flow from changes in prices to changes in the money supply. Consequently, the price level is exogenously determined