2  BIS Review 48/2010    Finally, the policy measures for reducing inflation have their externalities and associated costs in terms of reduction in aggregate demand in the short to medium run. Inflation dynamics Milton Friedman famously said, “inflation is always and everywhere a monetary phenomenon”.
3 It is believed that short-run inflation dynamics is largely dependent on supply-demand conditions and monetary expansion influences inflationary condition in the long-run. Monetary expansion could be caused by persistence of high fiscal deficit and the need to finance the same by monetisation. Consequently, high monetary growth could lead to continued excess demand for a prolonged period without matching increase in output and productivity.