Why Can’t Governments Just Print Money? A Hard Look at a Deceivingly Simple Question
Muhammad Amadeus Ihsan Candra, Research Executive
Introduction
Figure 1. Money and Prices in Weimar Republic (Mankiw, 2015)
The question of whether governments can print their way to prosperity is deceptively simple but economically profound. While the notion might sound naive, perhaps something one might ponder in childhood, it has in various forms, motivated real-world policy decisions with dramatic consequences. However, history has taught us that such methods of money creation often end in disaster, producing an economic crisis with piles of worthless money due to hyperinflation such as the famous case in the Weimar Republic (Figure 1).
Despite such historical lessons, the debate persists. On one side, popular misconceptions and conspiracy theories suggest that governments with the power to issue currency could effortlessly eliminate poverty. On the other hand, economists tend to issue a formulaic warning: printing money causes inflation. Hence, let us discuss whether theoretically printing money can lead to richness in the short run and hopefully in the long run.
Before that, let us agree that being rich is not about how much money we have. This is because fiat money does not have value on its own. It is valuable because the country’s law enforces it to have the ability to be exchanged with goods and services that can give us utility. Hence, even if it might be inaccurate according to some philosophy, let us assume that real wealth lies in the ability to consume more goods and services. Hence, we can reframe the question to: Can printing money increase real output in the short run, and more importantly, in the long run?
Another disclaimer is that this article assumes that the government is involved in the money supply decision. This is quite a strong assumption as in practice, for most developed countries, the central bank is an independent body. Furthermore, to avoid technical complications, let us assume that the newly printed money is distributed directly to people’s pockets. In practice, this is usually not the case as usually the central bank increases money supply by buying bonds. We also assume a closed economy to simplify the case.
What Happens When Money is Printed?
When the government prints money and distributes it, the supply of money circulating in the economy will increase. This means people hold more money, they are wealthier. When people are wealthier, they will want to buy more things. This means, the total demand for all goods and services in the economy (aggregate demand) increases.
What happens to output when aggregate demand increases?
Figure 2. AD-AS model
We will use Ahmed's (1993) explanation, which relies on Keynesian sticky nominal wage assumption, to explain the effect of an increase in aggregate demand on output. The Keynesian sticky nominal wage assumption states that nominal wage is fixed in the short run but flexible in the long run due to a long term contract between firms and workers that needs to be set at the beginning of every time period and cannot be changed during the time period. We will use the AD-AS model from Mankiw (2015) to illustrate the explanation. We can think of the AD-AS model as a basic demand-supply model applied to the whole economy, not just one good.
A. Short Run Equilibrium
Looking at Figure 2, we started at an equilibrium on point A, with price level at PLA and output at Yn. When aggregate demand increases, the AD curve shifts right from AD1 to AD2. In short, this causes the equilibrium to move from point A to point B, where both price level and output is higher (PLB and YB). In detail, this happens because an increase in aggregate demand causes an excess demand. The excess demand causes the price level to rise. The rise in price level means more incentive for producers to sell the output, causing the quantity of output to rise. Point B is called the short-run equilibrium.
B. Long Run Equilibrium
However, in the long run, due to the flexible nominal wage, the equilibrium does not stay on point B. In point B, the price level is higher than what is expected when firms and workers make a long term contract on nominal wage. Hence, in the long run, when they renegotiate, they need to update the nominal wage to take into account the price increase. Hence, in the long run the nominal wage becomes higher.
The higher nominal wage means that firms’ production cost rises. This shifts the aggregate supply to the left from AS1 to AS2. This causes output to fall back to its natural level of output (Yn) along with a higher price level at PLC.
You might be asking why the output falls back to the natural level Yn. This is because in the first place, when the output expands due to a higher aggregate demand, it is possible only because of the fixed nominal wage which makes the workers relatively cheaper compared to the price of the goods the firms are selling. However, in the long run, when the nominal wage rises proportionally to the price, workers are no longer relatively cheaper. Hence, there is no incentive for the firms to expand output to a level higher than the natural level of output.
Connecting back to our printing money case, our current conclusion is that a rise in the supply of money can only increase output in the short run by making the workers temporarily relatively cheaper. In the long run, when that temporary effect expires, the output goes back to its natural level. In other words, printing money makes us richer in the short run but not in the long run.
A Glimpse of Hope: Real Factor Effect of Money
From the previous part we saw that if a rise in money supply only affects aggregate demand, it does not affect output in the long run. This is the general consensus among economists. This is because the long run level of output (also called the natural level of output), depends on the long run aggregate supply curve (LRAS in figure 2). The long run aggregate supply (LRAS) depends on factors such as labor supply, capital, and technology (we will call these real factors). And most economists believe that a rise in money supply does not affect any of these factors.
Yet, a compelling question remains: what if changes in the money supply do influence these real factors, even indirectly? If so, then printing money might contribute not only to short-run demand stimulation but also to long-run economic growth. While this idea is controversial, several theoretical pathways offer a glimpse of how monetary policy might influence the supply side of the economy.
A. Price Stabilization
The first of these is price stabilization. It is uncontroversial that monetary expansion and contraction influence the price level. When monetary policy is used judiciously—expanding the money supply in downturns and contracting it in booms—it can help stabilize inflation. A stable price level reduces uncertainty, enhances investor confidence, and fosters a predictable environment for capital planning. According to Angeris and Arestis (2007), such stability is a critical precondition for increased investment. Over time, sustained capital formation can shift the LRAS curve outward, thus raising the economy’s long-run productive capacity.
B. Interest Stabilization
Closely related is the concept of interest rate stabilization. As Backhouse and Bateman (2011) argue, active monetary management can help maintain a low and predictable interest rate environment. This, in turn, reduces borrowing costs and encourages long-term investment in both physical and human capital. If sustained, such investment deepens the capital stock and contributes to productivity gains, both of which are vital components of long-run output.
C. Tobin Effect
Another thing that every economist agrees on is that printing money can cause inflation. Tobin (1965) postulated that moderate inflation may encourage investment as inflation lowers the rate of return on money, encouraging a portfolio shift towards capital. This is called the Tobin effect. If this is true, then money printing may increase real output in the long run through additional capital stock via the Tobin effect.
D. Crisis Prevention
The last theory from Ahmed (1993) postulates that even if altering money supply has no direct effect on LRAS, it can prevent LRAS from falling. By preventing LRAS from falling, it consequently prevents the long run level of output from falling. If this is true, altering money supply, which is done through money printing and burning, may cause us to be richer than what we would be without it. The next paragraphs will explain the mechanism.
The policy implication of the Keynesian sticky nominal wage model is that money printing can help recover the economy from recession (Ahmed, 1993). Let us suppose that the economy is undergoing a recession due to a fall in AD caused by a fall in autonomous consumption. Printing money will cause a rise in AD that can offset the initial fall, recovering the economy from the recession.
You might think that the economy can recover by itself in the long run when the nominal wage becomes flexible. However, the short run cyclical unemployment due to recession may become structural unemployment as workers lose their skills when they are unemployed for a long period of time. Hence, if we leave the economy on its own, the number of people able to work in the economy will decrease, causing the long run real output to be lower than before. In conclusion, as intervention prevents this rise in the natural rate of unemployment by preventing the cyclical unemployment from being high for long, the long run real output with printing money is higher than without it.
Austrian School Counter Argument
The Austrian School presents strong objections to the notion that monetary expansion can sustainably increase real output. The first three mechanisms previously discussed—price stabilization, interest rate management, and the Tobin effect—can all be challenged from this perspective. As explained in Sechrest (2005), Austrian Scholars postulate that higher investment does not necessarily lead to higher capital formation. It only does so if the investment is successful. The Austrian Scholars argued that by intervening to artificially increase investment, it will make the investment that was fundamentally unattractive to be possible. This causes malinvestment and hence have adverse effects towards output in the long run.
The Austrian critique also extends to the fourth mechanism: crisis prevention. A recession might be a form of creative destruction caused by the inefficiency of the current firms. If the government artificially ends this recession by injecting an artificial demand, it is similar to giving breath to these inefficient firms, who should have been dead and be replaced with new efficient firms. In the future, a moral hazard may happen among these firms. Firms will not try to be efficient if the central bank is behind them in case they fail. This creative destruction prevention will hinder long run output growth.
In summary, the Austrian Scholars argued that government intervention–whether through prices, interest, or aggregate demand–distorts market signals and undermines efficient resource allocation. They argued that we still need to believe in market forces, including its painful correction, to achieve the most efficient outcome.
Empirical Evidence
The previous section opens up the theoretical possibility of the long run output effect of money. However, we have as much counterargument as we have arguments. To shed light on this, is there any way for us to prove the causal link between money supply and real output empirically?
Figure 3. Linear Regression between Output Growth and M2 Growth (left by Ahmed, 1993 and right remade using 1966-2023 data)
Is It Worth The Inflation?
From all of our previous discussion, we still haven’t found a satisfying answer. Even so, let us assume that money supply can shift LRAS too besides AD. If this is true, is it enough to justify the use of printing money? The answer is unfortunately a no. This is because there is a risk of inflation. Hence, whether printing money is useful depends on two things: 1. Whether inflation will happen. 2. Whether the new combination of output and price level is preferred to the old one.
Will Inflation Happen?
Figure 4. Possible change in AD and LRAS due to printing money
If you read the previous paragraph carefully, I never mentioned that inflation will definitely happen. This is because the occurrence of inflation depends on the equilibrium between LRAS and AD. Looking at figure 4, given our assumption, printing money will shift both AD and LRAS to the right but we don’t know the magnitude of shift. If the AD shift is larger, inflation will happen (point B). If it is proportional, the price level will not change (point C). If the LRAS shift is larger, a deflation happens instead of inflation (point D).
It’s a Matter of Preference
Let’s assume that price level (PL) is a bad good, meaning it gives us negative marginal utility. Additionally, let’s also assume that output (Y) is a “good” good, meaning it yields us positive marginal utility. Turning back to figure 4, this means that point D, which has more Y and less PL is strictly preferred than the initial condition (point A). Likewise, point C which has more Y and the same PL is also strictly preferred. This means if printing money will cause the LRAS to shift at least as high as the shift in AD, it is strictly preferred.
However, when we cannot say anything about which one between point A and B is preferred. This is because point B has more Y than A but also more PL. If the people’s preference is something like indifference curve 1 (IC1), point A is preferred as point B is located on the upper left of the indifference curve, meaning that it yields a lower utility. This means the people are better-off without printing money. However, if the preference is like IC2, the people are better-off with printing money.
Reflection
This brings us to a deeper question: Why pursue real output growth at all costs? At its core, economics is not about producing the maximum quantity of goods and services, but about making efficient choices under scarcity. More output does not necessarily equate to more welfare.
Consider a hypothetical economy that dedicates all its resources to producing rubber duck toys. It may achieve impressive GDP growth, but would this allocation enhance societal well-being? Overproduction without regard to demand or utility is a misallocation of scarce resources.
The purpose of money is not to force production, but to facilitate voluntary exchange and efficient resource allocation. If a central authority dictates resource use—even toward productive capital—it risks overriding market signals and distorting the true needs of society. In the extreme, this undermines the very rationale for using money at all.
In short, real output growth is only desirable when the marginal benefit exceeds the marginal cost. Economic policy should aim not to maximize output blindly, but to ensure that resources are deployed where they generate the greatest net welfare.
Conclusion
So: Can printing money make a country rich? In the short run, yes. According to Ahmed’s (1993) Keynesian sticky wage framework, monetary expansion can stimulate real output by exploiting temporary price and wage rigidities. But this effect is fleeting. In the long run, real wealth—the kind that raises living standards and transforms economies—is determined by structural forces: innovation, capital, labor, and productivity. And these are largely immune to the printing press.
Still, some theories suggest that money creation could play a role in shaping long-term outcomes: by stabilizing prices, encouraging investment, or preventing economic scarring during crises. Yet these mechanisms remain contested. Austrian economists argue that such interventions distort market signals, foster inefficiencies, and ultimately suppress the very dynamism that drives real growth.
Empirical evidence offers little resolution. Correlation between money growth and output growth may exist, but causality remains elusive. As the Lucas Critique reminds us, past relationships unravel when policy expectations shift. The economy learns—and so must we.
Even if we assume money printing does stimulate long-run growth, the critical question becomes: at what cost? The answer depends on whether inflation is contained and whether the new economic equilibrium—of higher output and higher prices—is preferable to the old. Sometimes it is, but more often, it is not.
But perhaps the more fundamental question is not can we print our way to prosperity, but should we try? Economic policy should not chase quantity for its own sake. More output does not always mean better outcomes. A nation may produce endlessly—rubber ducks, concrete towers, or tanks—and still fail to advance human welfare.
In the end, prosperity is not a matter of printing money. It is a matter of using scarce resources wisely, of producing not more, but better—of creating value, not volume. A printing press can expand nominal wealth; real wealth must be earned.
References
Ahmed, S. (1993, July). Does Money Affect Output. Business Review. https://www.philadelphiafed.org/-/media/frbp/assets/economy/articles/business-review/1993/brja93sa.pdf
Angeris, A., & Arestis, P. (2007). Monetary policy in the UK. Cambridge Journal of Economics, 31(6), 863-884.
Backhouse, R.E., & Bateman, B.W. (2011). Capitalist Revolutionary. Harvard University Pres.
Lucas, R. (1976). Econometric policy evaluation: A critique. Carnegie-Rochester Conference Series on Public Policy, 1. https://doi.org/10.1016/S0167-2231(76)80003-6
Mankiw, N. G. (2015). Macroeconomics (9th ed.). Worth Publishers.
Sechrest, L. J. (2006). Explaining malinvestment and overinvestment. Quarterly Journal of Austrian Economics, 9(4), 27–38. https://cdn.mises.org/qjae9_4_4.pdf
Tobin, J. (1965). Money and economic growth. Econometrica, 33, 671-678.