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Academic Skills, Individual Assignment: The influence of growth rate of money supply and interest rates on inflation, VU, International Business Administration, Year 1

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Essay for individual Assignment Academic Skills IBA VU year 1

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Course Name: Academic Skills
Student Name: Bram Hezemans Student ID: 2713689
Name Tutorial Teacher: Selen Oskan
Title: The influence of growth rate of money supply and interest rates on inflation

, Introduction and research question
During the last twenty years, European average price levels have been rising continually. The
average increase of prices in an economy, country or area with the same currency is called
inflation. This phenomenon is caused by a dozen of variables such as: cost of materials for
production, cost of labor for production, overall economical productivity, taxes, exchange
rates, a country’s own or a nearby economy growing, interest rates, the government buying
bonds and the money supply (Kibritçioğlu, 2002). In this literature review, only the influence
of money supply and interest rates on inflation will be reviewed.
Inflation has been and will always be a contemporary topic in international business,
for it has a substantial impact on business operations. Price increases and fluctuations have an
effect on a particular business itself, their employees and their clients. Additionally, these
inflations and deflations are an ever-evolving occurrence.
According to (Malmendier & Nagel, 2016) people and businesses adjust their
borrowing, lending and purchasing behavior to the degree of inflation. By analyzing over 50
years of data on inflation, they found that people’s attitude towards inflation changes the total
amount of inflation. According to (Galı́, Gertler, & López-Salido, 2001) a pattern can be seen
in many industrialized nations. Especially in euro countries an evident repetition of inflation
linked to monetary policy aspects such as interest rate and growth rate of money is discerned.
(Koopman, 2020) states that European central banks do not have the desired control on
inflation and that political efforts may help price levels rise more.
The current inability to control and predict inflation to a greater extent conveys the
research gap. Many studies on historical inflation numbers have been done. In these studies,
researchers have tried to link variables together and make sense of the subsequently
following amount of inflation. The Philips curve is most commonly used as an indicator for
future inflation, but this theory also has its limitations and inaccuracies.
In this literature review, to get a better understanding of inflation, the answer to the
following question will be given: What is the influence of growth rate of money and interest
rates on inflation? Firstly, a description of the theoretical constructs inflation, growth rate of
money and interest rates will be given. Followed by a discussion of the theory and specifying
the relationship between the three theoretical constructs. Finally, six relevant extant research
findings will be discussed and two hypotheses and a research model will be formulated.

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