Inflation : A New Hypothesis, Accurate 100 Year Regression Model & Forecast

The lack of evidence for current theories of inflation, including the classic Keynesian approach and the classic Quantity Theory of Money (QTM) approach, is presented, followed by a new hypothesis for inflation. Two-Dimensional QTM (2-D QTM) tracks the cumulative imbalance of money supply versus nominal GDP. The paper reviews evidence indicating that when excessive cumulative money supply exists (a reservoir of excessive money), inflationary pressure increases. Conversely, when insufficient cumulative money supply exists, deflationary pressure increases. The role of real GDP growth and money supply growth in controlling inflation is also presented, as is a multiple regression model which has predictive value for inflation forecasting. Finally, problems with the classical method of measuring the velocity of money are discussed