International Reserves and World-Wide Inflation: Further Analysis

Abstract

N MY 1976 ARTICLE investigating the relationship between increases in the global holdings of international reserves, changes in the world money supply, and world-wide inflation, I argued that there is a direct causation running from increases in global reserves to the world money supply and further to worldwide inflation. The basis for the argument is contained in the sequential linkage between (1) reserve increases causing an expansion of the money supply and (2) a monetary expansion causing inflationary pressures. While these arguments are well established for single economies, I argued that there is also a global chain of events linking changes in reserves, money, and prices. In this note, I address first the relationship between global reserve changes and the world money supply and then provide further evidence on the linkage between global reserve changes and world-wide inflation-the central issue of my original paper.