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Chapter 28 - Money Growth and Inflation
The Velocity of Money
For the latest numbers on the velocity of money, see the web site of the Federal
Reserve Bank of St. Louis. You can see how changes in
velocity are related to the opportunity cost of money, which depends
on the levels of interest rates.
Costs of Inflation
Economists have written extensively about the costs of inflation.
One very readable and interesting example is "The Long-Run Costs
of Moderate Inflation"
by Greg Hess
and Charles Morris of the Kansas City Fed, which discusses a number
of less obvious problems caused by inflation.
In his article, "What Is the Optimal Rate of Inflation?", San
Francisco Fed economist Tim Cogley shows how the costs of inflation
lead you to a natural conclusion about the best rate of inflation to
have. It may well be optimal to have a rate of inflation that’s
negative -- a deflation.
Inflation-Indexed Bonds
In recent years, the U.S. government has sold bonds that are adjusted for inflation,
allowing an investor to lock in a fixed real return (before taxes).
For complete details, and the interest rates on the bonds that
have been issued so far, see the Treasury
Department’s web site.
Eliminating Inflation
What are the problems associated with eliminating inflation and
maintaining stable prices? That was the focus of an interesting
symposium on "Achieving Price Stability"
sponsored by
the Federal Reserve Bank of Kansas City in 1996.
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