A phase transition in monetary function explains expansion without inflation

Abstract

Large monetary expansions do not necessarily generate consumer-price inflation, challenging scalar views of "money supply." Here we propose that monetary function is phase-dependent: newly issued base money can occupy distinct functional compartments with different coupling to prices. Starting from an accounting framework that separates reproduction, consumption, and reservation, we operationalize a measurable order parameter, phi=RB/MB, the reserve-share fraction of the monetary base. Using Japan's monthly record (1971-2026), we identify a compositional phase transition after 2013 from a cash-dominated to a reserve-dominated regime, quantitatively captured by a Landau-type order-parameter transition. Phase-conditional local projections using unexpected (residual) base-growth shocks show that, in Japan, unexpected base expansions are absorbed primarily as reserve balances-phi rises significantly-rather than entering the consumption-goods transaction sector; consequently, the core CPI inflation response is strongly attenuated and can even reverse sign. This demonstrates that increases in monetary supply do not necessarily cause inflation: the key is the "phase" in which incremental money accumulates (reservoir versus circulation). We further define function-specific efficiencies for reservation absorption and CPI transmission and provide an operational distinction between circulation-driven and reservation-dominant inflation regimes.