Showing papers on "Inflation published in 1973"
01 Mar 1973
TL;DR: The tax-like effect of an increase in the anticipated rate of inflation has been studied by various authors as mentioned in this paper, who have had various experiments in mind and thus arrived at differing measures of the revenue from inflation.
Abstract: What are the essential features of the thought-experiment one has in mind when he speaks of the “tax-like effect” of an increase in the anticipated rate of inflation? Various authors have had various experiments in mind and thus arrived at differing measures of the revenue from inflation.
497 citations
TL;DR: In this article, the authors consider a model in which money is neutral, with real growth and capital accumulation both being exogenous with respect to the money supply and price level and moreover with both equaling zero.
Abstract: SEVERAL ECONOMISTS2 have argued that if individuals correctly perceive the rate of inflation so that their expectations are "rational," then deterministic models of money and economic growth are unstable. In this view, points on the steady state equilibrium paths examined by Tobin [9] and others are "saddlepoints," there being a tendency to diverge more and more from such a path as time elapses if the system is not initially on the path. The source of instability is understood most easily in the context of a model in which money is "neutral," with real growth and capital accumulation both being exogenous with respect to the money supply and price level and, moreover, with both equaling zero. Time is continuous. The price level P and money supply M are assumed at each moment to satisfy the demand function for real balances
317 citations
TL;DR: In this paper, the authors make proper allowance for one additional factor, which is entirely consistent with the spirit of the Expectation Theory but was not duly taken into account, namely the effect of expectations of future changes in the price level.
Abstract: In a number of recent papers [11] [12],2 it has been shown that, for the United States, the behaviour of the term structure of interest rates can be explained remarkably well by combining the "Preferred Habitat" version of the Expectation Theory with a simple and readily tractable model of the formation of expectations, a model in which expected future rates are represented by a linear function of past rates. The purpose of the present paper is to generalize that approach and to strengthen the evidence supporting it in two major directions. First, we endeavour to broaden and refine the earlier analysis by making proper allowance for one additional factor, which is entirely consistent with the spirit of the model but was not duly taken into account, namely the effect of expectations of future changes in the price level. Evidence is provided that this additional factor is empirically important and that by allowing for it one can obtain a significant improvement in fit as well as a reduction in the serial correlation of the residual error. Some further improvement can also be achieved by introducing a variable intended to measure the effect of changes in the uncertainty about the future course of interest rates on the risk premium. Our second goal is to provide independent evidence in support of both the expectation theory and of our model of expectation formation and of the determinants of the risk premium, by exploring the relation between our model and the "rational expectation hypothesis". To this end we first derive expressions for the "optimal" (in the least square sense) linear forecast of all future rates, conditional upon the past history of rates of interest and rates of inflation. We show that the relation between the long rate and the history of short rates and prices which is estimated in the process of fitting our term structure equation is broadly similar to the relation that would hold if, in fact, (1) the long rate were an average of expected future rates-as called for by the expectation hypothesis-and (2) the expected future rates tended to represent optimal forecasts-as called for by the rational expectation hypothesis. These results provide strong evidence in support of both hypotheses, and of our term structure model built on them. Further
283 citations
TL;DR: In this paper, the authors use the Fisherian tradition of a proper definition of intertemporal consumption and lead to the conclusion that a price index used to measure inflation must include asset prices.
Abstract: Two commonly cited and newsworthy price indices are the Bureau of Labor Statistic's Consumer Price Index and the Commerce Department's GNP deflator. These indices have become an important part of our economic intelligence and are frequently considered to be the operational counterparts of what economists call "the price level." They, therefore, often are used as measures of inflation and often are targets or indicators of monetary and fiscal policy. Nevertheless, these price indices, which represent measures of current consumption service prices and current output prices, are theoretically inappropriate for the purpose to which they are generally put. The analysis in this paper bases a price index on the Fisherian tradition of a proper definition of intertemporal consumption and leads to the conclusion that a price index used to measure inflation must include asset prices. A correct measure of changes in the nominal money cost of a giverl utility level is a price index for wealth. If monetary impulses are transmitted to the real sector of the economy by producing transient changes in the relative prices of service flows and assets (i.e., by producing short-run changes in "the" real rate of interest), then the commonly used, incomplete, current flow price indices provide biased short-run measures of changes in "the purchasing power of money." The inappropriate indices that dominate popular and professional literature and analyses
259 citations
TL;DR: The relationship between commodity price inflation and interest rates has been studied in this paper, where the effect of actual inflation on anticipated inflation is taken to help determine the "nominal" rate of interest.
Abstract: This is a study of the relationship between commodity price inflation and interest rates. One of the chief avenues through which inflation has been posited to affect interest rates is through the effect of actual inflation on anticipated inflation, which is then taken to help determine the "nominal" rate of interest. For this reason, the manner in which price anticipations are formed is a topic that cannot help but occupy an important role in a study such as this. Although many papers have been written on the topic,l no single explanation of the relationship between inflation and interest commands wide acceptance. As proof of this statement, it is sufficient to note that the name that Keynes gave to that relationship-the Gibson paradox-has stuck. Keynes's claim was that over long periods of time in the United States, England, and other countries, interest rates had been highly correlated with the aggregate level of commodity prices. Keynes [20] named this empirical regularity the Gibson paradox2 since it seemed
129 citations
TL;DR: In this article, the problems of price and wage inflation and unemployment are discussed in a context of a model of class struggle developed by R. M.Goodwin, which is an analog of the Volterra-Lotka preypredator model.
128 citations
TL;DR: In the context of the Phillips curve discussions, this basic, classical conclusion has recently been reestablished by neoclassical writers, such as Mortensen [11] and Phelps [13], according to which any tradeoff that may exist between unemployment and inflation must be caused by adjustment lags, money illusion, and similar frictions which disappear in long run equilibrium.
Abstract: An important implication of classical monetary theory is that, if fully expected and adjusted to, the rate of inflation cannothaveaninfluenceonrealeconomic activity. In the context of the Phillips curve discussions, this basic, classical conclusion has recently been reestablished by neoclassical writers, such as Mortensen [11] and Phelps [13]. According to them, any trade-off that may exist between unemployment and inflation must be caused by adjustment lags, money illusion, and similar frictions which disappear in long-run equilibrium. Any such trade-off is, thus, strictly temporary and, indeed, illusory. Only one rate of unemployment-the natural rate of unemployment-is compatible with a constant rate of inflation. Any attempt by governments to attain a permanently lower or higher rate of unemployment by ordinary fiscal or monetary methods would lead to ever-increasing rates of inflation or deflation. The mechanism through which the Phillips curve becomes unstable is the generation of and adjustment to inflationary expectations. Although the logic of this classical approach cannot be faulted, the empirical evidence on the manner in which expectations are generated and adjusted to is not strong (see Lucas and Rapping [10], Solow [16], and Brechling [5] ).
69 citations
61 citations
01 Dec 1973
54 citations
Posted Content•
53 citations
TL;DR: In this paper, the precise relations between asset prices and individual expectations, risk preferences, and time preferences are not well understood, and they can be subsumed under the phrase, "claim on consumption."
Abstract: Financial assets produce no consumption goods. They cannot be used to satisfy such human desires as food or shelter. Instead, their value stems from claims on future consumption. As these claims fluctuate ln expected magnitude, in risk of being satisfied, and in the time until fulfillment, asset prices also vary. That much economists and men of affairs take for granted. But the precise relations between asset prices and individual expectations, risk preferences, and time preferences are not well understood. Economic tradition has assigned to financial assets the quality of"value storage." Money has received additional credit as a "medium of exchange," that is, a completely "liquid" asset; but both characteristics can be subsumed under the phrase, "claim on consumption." For example, the "liquidity" value of a currency arises from its immediate recognition.l C)ne can easily verify this by noting the differences in waiter response when paying for lunch with dongs in New York and Hanoi; or,
TL;DR: In this article, the effects of alternative inflationary policies on the distribution of lifetime income were investigated in an open economy with fixed exchange rates and difficulties of adjusting these exchange rates, there can be little doubt that inflation produces serious social costs.
Abstract: In recent years, the restraint of inflation has been one of the most important considerations of macroeconomic policy. On several occasions drastic measures have been taken to halt inflation. Most often these policies have led to significant unemployment and loss of output. But after a quarter century's experience with inflation, most economists and politicians are looking for new and less draconian tools to combat inflationary tendencies. While most analysts agree that price stability is desirable, there is wide disagreement about the costs of inflation. In general, three reasons for price stability are mentioned. First, price stability encourages a favorable external balance. In an open economy with fixed exchange rates and difficulties of adjusting these exchange rates, there can be little doubt that inflation produces serious social costs. Second, it is sometimes alleged that inflation leads to inefficient resource allocation. There is, however, no evidence that the allocational effects of the mild inflations observed in advanced countries are significant. Third, it is often argued that inflation introduces a significant, arbitrary, and regressive redistribution of ncome. The present study is concerned mainly with the third of these costs of inflation. More precisely, we attempt to determine the effects of alternative inflationary policies on the distribution of lifetime income.l It is useful to lay out briefly the procedures used.
TL;DR: The authors examined the relative economic costs of price inflation and unemployment and found that the economic costs were not as high relative to the costs of unemployment as the reactions and statements of the authorities have implied.
Abstract: [The Bank of Canada's] reactions reflect the placing of a very heavy implicit weight on price stability compared with higher employment, presumably based on a judgement about the relative economic costs of more unemployment and more price inflation. The evidence examined on the relative economic costs of price inflation and unemployment suggests that the economic costs of inflation are not as high relative to the costs of unemployment as the reactions and statements of the authorities have implied. 127, p. 132] 1
TL;DR: In this paper, a generalization of the Phillips curve for a developing country is proposed and tested, and the central conclusion of the paper is that, while an expansion of effective demand and employment beyond the previous crest gives rise in the short run to inflationary pressures on the labour market, it also induces an on-the-job training effect for the labour force previously excluded from the productive process.
Abstract: The aim of the present study is to propose and test a generalization of the Phillips curve for a developing country which starts out with a substantial volume of structural unemployment and gradually works it down in the development process. The central conclusion of the paper is that, while an expansion of effective demand and employment beyond the previous crest gives rise in the short run to inflationary pressures on the labour market, it also induces an on-the-job training effect for the labour force previously excluded from the productive process. The resulting permanent improvement in the skill and competitiveness of the labour force thereafter reduces the inflationary pressure associated with any given level of employment. Accordingly, in a developing country, the Phillips curve can be pictured as a frontier which in the process of development tends to the left and downwards. This inference will be shown to be supported by empirical data drawn from the experience of the Italian post-war period. In this analysis we focus on the industrial sector on the ground that in a developing country the latter tends to set the pace for the entire wage structure. The pioneering studies of Stigler [14] and [15], Alchian [1], Holt and David [4], and Phelps [11] have recently laid the foundations for a new micro-economic theory of employment and inflation and stimulated a growing literature on the theoretical basis of the Phillips curve.3 These studies, however, have the common characteristic of dealing with a labour market close to full employment. Thus, like the previous work on the Phillips curve, they are directly relevant only to already developed countries. We propose to show, however, that the new approach and, in particular, the formulation of C. C. Holt can be readily generalized to analyze the labour market of a developing economy. Part I briefly reviews Holt's analysis. Part II extends its implications to a developing system. In Part III, the central hypothesis of the paper is tested. Some implications are
TL;DR: In this paper, a principal components analysis of 20 Dutch market interest rates is presented, and the main conclusions are: (1) the first component identifies the true interest rate, while the second and third component are related to risk and the rate of inflation.
Book•
[...]
09 Aug 1973
TL;DR: In this article, the authors present a policy index for trade among nations in terms of inter-necessity, inter-security, and inter-investment, with a focus on saving or non-consumption.
Abstract: Preface 1. exchange 2. Inter-necessity 3. Production 4. Prices 5. Time 6. Money 7. Discounting 8. Enterprise-investment 9. Saving, or non-consumption 10. Employment 11. Inflation 12. Trade amongst nations 13. Taxes 14. Policy Index.
01 Jan 1973
TL;DR: In this article, the authors examined the effect of wage and price control on the performance of the "docile worker" and found that the response of profits to the business expansion in 1972 was sluggish, whereas the price rebound of 1973 appeared to have regained the lost ground.
Abstract: IN A PREVIOUS PAPER I reached the conclusion that Phases I and II of the Nixon wage-price control program had achieved a slight reduction in the advance of wages and a marked decline in the rise in prices between 1971:3 and 1972:2 as compared with econometric simulations of the hypothetical paths in the absence of controls.' At first glance these relationships appear to have been reversed in the past year. Prices have exploded upward at rates exceeding all forecasts, whereas the apparent absence of any significant response of wages to observed price behavior has led to widespread puzzlement about the mystery of the "docile worker." If the response of profits to the business expansion in 1972 was sluggish, the price rebound of 1973 appears to have regained the lost ground.2 The purpose of this paper is to examine this view of recent wage and
TL;DR: In this article, the authors find it difficult to reach agreement about the effects on economic growth of depreciation of the money value, and they define certain terms in different ways, and another one is that many other factors as well as inflation have an impact on the economic growth.
Abstract: Economists find it difficult to reach agreement about the effects on economic growth of depreciation of the money value. One reason is that they define certain terms in different ways, another one is that many other factors as well as inflation have an impact on economic growth. They may intensify or compensate for positive and negative relations between inflation and economic growth.
Book•
09 Aug 1973
TL;DR: The International Monetary Agreement (IMA) is the greatest monetary agreement in history as discussed by the authors, and it was signed by the United Kingdom and the International Monetary Conference (IMC) in 1913.
Abstract: Preface - PART 1 THE INTERNATIONAL MONEY SYSTEM: POLITICS AND ECONOMICS - The Name of the Game is Money - A System is How the Pieces Fit - 'The Greatest Monetary Agreement in History' - 'The Gnomes of Zurich': A London Euphemism for Speculation Against Sterling - Gold: How Much is a Barbarous Relic Worth? - They Invented Money so they could have Inflation - Disinflation, Deflation and Depression - Oil and the OPEC Roller Coaster - The Dollar and Coca-Cola are both Brand Names - Radio Luxembourg and the Eurodollar Market are both Offshore Stations - Central Bankers read Election Returns, not Balance Sheets - Monetary Reform: Where do the Problems go when they are Assumed Away? - PART 2 LIVING WITH THE SYSTEM - Bargains and the Money Game - The Underground Economies and the Bureaucratic Imperative - International Tax Avoidance: A Game for the Rich - Banking on the Wire - The Rise of the House of Cornfeld: And the Fall - Why are Multinational Firms Mostly American? - Japan: The First Superstate? - Optimal Bankrupts: Deadbeats on an International Treadmill - Zlotys, Rubles, and Leks - Fitting the Pieces Once Again - Index
Posted Content•
TL;DR: In this article, real income accrued as capital gains is not taxed neutrally under current tax law, and an inflation distortion penalizes and a tax deferral distortion benefits the recipient of gains.
Abstract: Under current tax law, real income accrued as capital gains is not taxed neutrally. An inflation distortion penalizes and a tax deferral distortion benefits the recipient of gains. This study first...
TL;DR: In this paper, it was shown that Feldstein and Eckstein's model of interest rate determination does not successfully synthesize the dimensions of the "Fisher effect" and, in particular, it is possible to construct examples of economies in which there is really no Fisher effect but in which Feldstein's test would point to the presence of one.
Abstract: Martin Feldstein and Otto Eckstein (1970) have set out and estimated a model of interest rate determination which they claim represents an integration of Keynes's liquidity preference theory with Irving Fisher's theory of the impact of expected inflation on interest rates. They achieve their integration by first "inverting" a Keynesian demand function for real balances, solving it for the nominal rate of interest. Then to incorporate Fisher's effect, they simply add to the right side of this equation a distributed lag in current and past actual rates of inflation, the same proxy for expected inflation that Irving Fisher used. Feldstein and Eckstein interpret sizable and statistically significant estimated coefficients on the elements of that distributed lag as confirming the presence of an effect of anticipated inflation on the interest rate. It is questionable whether Keynes's and Fisher's theories stand in need of any integration at all, since they are in principle compatible in the first place. The two theories are on very different footings. Keynes's liquidity preference theory is a theory about one particular structural equation relating real money balances, income, and the nominal rate of interest. On the other hand, Fisher's theory is one about how the whole economy is put together; that is, it is a statement about the reduced form equation for the nominal interest rate. In Fisher's theory, an exogenous increase in the anticipated rate of inflation is asserted to work its way through the economy in such a fashion that the nominal interest rate rises by the amount of the increase in anticipated inflation.1 In this note, I suggest that Feldstein and Eckstein's equation does not successfully synthesize Keynes and Fisher. Furthermore, I suggest that Feldstein and Eckstein's econometric procedure is not a good one for estimating the dimensions of the "Fisher effect." In particular, the Fisher effect may be present in full force but still not be detected by Feldstein and Eckstein's procedure. On the other hand, it is possible to construct examples of economies in which there is really no Fisher effect but in which Feldstein and Eckstein's test would point to the presence of one. Finally, I show that in a model that includes both Keynes's liquidity preference schedule and a reduced form for the interest rate like the one posited by Fisher, Feldstein and Eckstein's equation is not statistically identifiable.
TL;DR: In this article, the problem of the firm that must choose from a set of feasible borrowing sources that includes foreign as well as domestic sources was considered, and a simple decision rule was shown to be sufficient for choosing an international borrowing source, and this rule was compared with a rule from the literature.
Abstract: The problem considered is that of the firm that must choose from a set of feasible borrowing sources that includes foreign as well as domestic sources. Expressions are developed for the effective cost of borrowing under conditions of inflation and devaluation and under the condition of either local or foreign ownership of the firm. One simple decision rule is shown to be sufficient for choosing an international borrowing source, and this rule is compared with a rule from the literature.
TL;DR: In this paper, a model of long-run profit maximization in firms with market power and interested in earning a target return to capital is proposed, based on the "catching-up" hypothesis and "Ackley-Galbraith" hypothesis.
Abstract: This paper has five main objectives: to reformulate the "administered prices inflation hypothesis"; to build a model of longrun profit maximization in firms with market power and interested in earning a target return to capital; to test the "catching-up" hypothesis and the "Ackley-Galbraith" hypothesis as two parts of the reformulated administered prices inflation hypothesis (A.P.I.H.); to study the influence of size, degree of concentration and the actual use of market power on administered prices inflation; and, finally, to analyze the effectiveness of anti-inflationary policies seen in the light of our empirical results.1
[...]
TL;DR: A reply to a request for a brief statement on inflation from the editors of the Mexican journal Problemas del Desarrollo: Revista Latinoamericana de Economia can be found in this paper.
Abstract: The following is the text of a reply to a request for a brief statement on inflation from the editors of the Mexican journal Problemas del Desarrollo: Revista Latinoamericana de Economia . —The Editors This article can also be found at the Monthly Review website , where most recent articles are published in full. Click here to purchase a PDF version of this article at the Monthly Review website.