Old quantity-theory a partial-condition...

In economics the conclusions change as the evidences change. The evidences from the western-world have changed the views of economists at, “how money works in the long-run?” The old quantity theory of money that increases in money-supply in circulation will create a proportional increase in price of goods and services, is only partially true. Our recent study shows that despite huge increase in the money-supply, price-level in the developed world has gone down and there is a deflationary bias in all almost all the developed economies. The trend has shown that as the time has passed more money-supply has reduced interest-rate and borrowing cost which actually reduced the prices in these economies. The old quantity theory is by classical and supply-side economists, but they took only demand-side into account. They concluded that more money-supply will result in higher demand and prices. But, they failed to bring supply in the perspective because more money supply may also reduce interest-rate on borrowing cost and price. They missed that supply might also increase which will lower the price-level, opposite of the old theory. Therefore our RBI governor should focus on the supply argument to lower inflation instead of controlling demand which might lower country’s growth-rate, an underlying objective of monetary-policy. By increasing both demand and supply the governor would do a favour to the economy’s growth-rate. We are already in the interest-rate-cut-cycle, but timing is also important because supply comes with a lag. Interest-rate transmission, too...