rates that motivated people to borrow. ) i will base the following arguments on the classic work of friedman and schwartz ( 1963 ), as well as on my own article for politicka ekonomie ( michl, 2019 ), a study by borio et al. ( 2023 ) for the bank for international settlements and a lecture by isabel schnabel from the ecb ( schnabel, 2023 ). for further discussion, i recommend frait ( 2023 ), mandel and dvoak ( 2022 ) and the 12 - year - old yet still forward - looking article by my colleague eva zamrazilova zaarovany kruh levnych penz [ the vicious circle of cheap money ] ( zamrazilova, 2011 ). in macroeconomic theory, inflation is most often defined as sustained growth in the price level caused by too much money being issued. we don ’ t explain high inflation by going through each item of the consumer basket and trying to give reasons for the cost of potatoes, cars or shirts. we explain it by looking at the quantity of money in the economy, which we denote by m ( for money ). according to friedman and schwartz ( 1963 ), there is a relation between changes in the quantity of money ( m ) and changes in nominal income ( p * y ), but over a time scale of decades, the rate of growth of money ( m ) primarily affects prices ( p ). in the authors ’ view, real output depends in turn on factors such as the enterprise and inventiveness of 2 / 6 bis - central bankers'speeches individuals and firms and on the institutional environment. they inferred from this that “ inflation is always and everywhere a monetary phenomenon ”, in the sense that it is and can only be produced by money growing faster than output. in my article, i tested the relationship between money in the economy and consumer price inflation on us data from 1959 to 2018, for which the longest time series are available ( michl, 2019 ). only before the financial crisis ( from 1959 to 2008 ), however, was there a relationship between m2 and consumer price inflation ( and then only at the 10 % significance level and only according to the engle - granger test ). given that there was no relationship for the full period of 1959 – 2018 and that there was one for the precrisis period, i can state that the one which existed

increases. without strong growth in the quantity of money, the price level has to stop rising. 3 / 6 bis - central bankers'speeches that ’ s why i said straight away on my appointment as central bank governor in may 2022 ( michl, 2022b ) that to tame inflation we need to tame the growth of the money supply in the economy. let ’ s use the czech republic as an example. the flow indicators are currently telling us the following : new mortgages stood at czk 67 billion in january – august, the lowest figure since 2015 and down 47 % year on year. koruna - denominated corporate loans amounted to czk 163 billion in the same period, down 41 % year on year. the stock indicators reveal where the problem lies : m3 growth was 9. 6 % year on year in august ( the latest available reading ). the main items of m3 include loans to government and loans to the private sector. our tight monetary policy has reined in loans to the private sector. they recorded yearon - year growth of just 4. 7 % in august ( as against 12. 3 % a year earlier ). loans to central government rose by 12. 8 % in the same period ( 13. 3 % a year earlier ). such large government debt financing requirements represent an upside risk to inflation. by the way, banks in the czech republic now have 18 % of their assets ( if we deduct deposits with central banks ) in government bonds. this is one of the highest figures in the eu. milton friedman ’ s view that restrictive monetary policy is not dependent on the support of fiscal policy and can be effective in its own right was formulated for a situation where there was an appropriate amount of bank liquidity. except we are now living in a highinflation system in which previous monetary policy mistakes have given rise to a sea of excess liquidity that makes it easy to finance government debt ( see michl, 2015, 2023a ). yet reducing the government budget deficit plays a key role alongside tight monetary policy in the fight against inflation ( for details, see also mandel and dvoak, 2022 ). that ’ s why i have been saying at the press conferences after all our monetary policy meetings that lowering the government debt ratio is another key condition for bringing down inflation ( see also, for example, cochrane, 2023 ). 1 to sum up, the data shows that we have significantly tamed money growth