Inflation and Structural Change in the Euro-Dollar Market

Abstract

Several people, including the Swiss Banking Corporation,² have in recent times undertaken the task of inquiring whether the Euro-dollar market contributes to world inflation. This activity, of course, presupposes that the theoretical and empirical problem of whether an expansion of the money supply leads to inflation has already been solved, in the sense of establishing a positive correlation between increases in the money supply and price increases, and of knowing the direction and the parameters of that correlation. Granted that this correlation has been found theoretically, the problem then becomes ones of proving it empirically, and that involves deciding what particular magnitude must be defined as the ‘world price level’. After this practical problem has been satisfactorily coped with, it is necessary to consider whether Euro-dollar deposits can be called ‘money’ and, if that much can be said about them, it must be decided what is the relevant aggregate of deposits that must be called ‘Euro-dollar deposits’. When that is done, the remaining part of the job is to prove that Euro-dollar deposits contribute to world inflation. Finally, it is relevant to establish whether Euro-dollar deposits contribute significantly to world inflation.

I must express my gratitude to Don Hester and René Higonnet, who read an earlier draft of this paper and made many extremely useful comments.