Beyond Monetarism: A Comprehensive Approach to Understanding Inflation

We construct new measures of structural change at the economy level and at the industry levels and then demonstrate with Bayesian regression models that inflation rate is mainly determined by these structural changes. There is no room for monetary policy affecting inflation rates. The main finding of the study is that structural changes and dummy variables of financial crisis and the dummy variable for COVID-19 have significant effects on the inflation rate, contrary to the monetarist views that money supply growth is the main determinant of inflation rates and nominal GDP growth. Our findings have significant implications for policymakers, suggesting that traditional monetary policy tools may be less effective than structural reforms in managing inflation.