The Relationship Between Money Supply and Price Movements from A Structural Perspective

Abstract

This paper examines the impact of money creation and flow on prices, including house prices and financial asset prices, from a structural perspective. By analyzing central bank monetary statistics, the study highlights the relationship between money supply and price changes, emphasizing long-term effects on consumer prices and short-term effects on incremental household deposits. Furthermore, the study emphasizes the importance of monitoring changes in the money supply, both domestically and internationally, with specific attention to the PPI (Producer Price Index) changes. The real estate market is identified as a significant driver of money creation, particularly through deposits in non-bank financial institutions. Additionally, deposits in non-bank financial institutions are found to be an important indicator of stock market volatility. The paper recommends that asset prices be included as a key target of monetary policy and advocates closely monitoring trends in international commodity prices.