The U.S. Economic Paradox after the 2008 Financial Crisis: Expansion of Money without Inflation

Abstract

Although previous studies of the U.S. monetary policy and the Federal Reserve’s role as the national central bank have increased our understanding to the post-crisis economic transformation, they have not fully mentioned the unusual relationship between money supply and inflation since the 2008 financial crisis. To find the answer, I first analyze the key concepts of the U.S. modern currency and monetary base. Secondly, to recognize the issue, I calculate and compare the changes in inflation and money supply from 2009 to 2015, year by year. Lastly, I apply three principle economic theories to test the relationship between the U.S. money supply and inflation from 2009 to 2015, and they are (1) the quantity theory of money, (2) aggregate demand-aggregate supply, or AD-AS model paired with the Phillips curve, and (3) exchange rate theory. After all, I conclude that these three classical theory of monetary policy and inflation were not applicable for the post-crisis U.S. economy anymore.