The Fiscal vs. Monetary Theory of Inflation

Published September 14, 2022

John Cochrane explains that the economic phenomenon of inflation concerns not relative price increases but rather an increase in all prices and wages. Cochrane then demonstrates how the government’s response to the COVID pandemic has caused the current 40-year highs of inflation. Finally, Cochrane shows how the fiscal and monetary theories explain inflation and where they differ.

Discussion Questions:

1. Why does the interest rate affect inflation?
2. How does the fiscal theory of inflation differ from the monetary theory?

Additional Resources:

• Read “Fiscal Histories,” by John Cochrane. Available here.
• Listen to “What ‘Is’ Is: John Cochrane on Recessions, Inflation, the Fed, Debt and ‘Green Pork,’” with Bill Whalen and John Cochrane. Available here.
• Read “Inflation and Monetary Policy,” via Policy Insights by PolicyEd. Available here.