Modeling Inflation Using a Non-Equilibrium Equation of Exchange

This paper's objective is to provide an improved model of inflation for use in dynamic macroeconomic models. Fisher's equation of exchange is recognized as a causal relationship that shows how the price level responds to changes in aggregate production, the money supply, and the velocity of circulation of money, but those responses are spread over time, rather than instantaneous.The paper offers first a qualitative discussion of what can change in a country to cause the factors in the equation of exchange to change and how those causes might be controlled. It then develops a time-dependent quantitative model of inflation, suitable for use in a simulation, based on delays that are distributed over time.This paper provides equations that can be used to model changes in the price level (i.e. inflation) that result from a variety of changes in a country that affect the values of the country's aggregate production, money supply, and/or velocity of circulation of money.