Showing papers on "Inflation published in 1977"

Political Parties and Macroeconomic Policy

Abstract: This study examines postwar patterns in macroeconomic policies and outcomes associated with left-and right-wing governments in capitalist democracies. It argues that the objective economic interests as well as the subjective preferences of lower income and occupational status groups are best served by a relatively low unemployment-high inflation macroeconomic configuration, whereas a comparatively high unemployment-low inflation configuration is compatible with the interests and preferences of upper income and occupational status groups. Highly aggregated data on unemployment and inflation outcomes in relation to the political orientation of governments in 12 West European and North American nations are analyzed revealing a low unemployment-high inflation configuration in nations regularly governed by the Left and a high unemployment-low inflation pattern in political systems dominated by center and rightist parties. Finally, time-series analyses of quarterly postwar unemployment data for the United States and Great Britain suggests that the unemployment rate has been driven downward by Democratic and Labour administrations and upward by Republican and Conservative governments. The general conclusion is that governments pursue macroeconomic policies broadly in accordance with the objective economic interests and subjective preferences of their class-defined core political constituencies.

Nobel Lecture: Inflation and Unemployment

Abstract: In the past several decades, professional views on the relation between inflation and unemployment have gone through two stages and are now entering a third. The first was the acceptance of a stable trade-off (a stable Phillips curve). The second was the introduction of inflation expectations, as a variable shifting the short-run Phillips curve, and of the natural rate of unemployment, as determining the location of a vertical long-run Phillips curve. The third is occasioned by the empirical phenomenon of an apparent positive relation between inflation and unemployment. The paper explores the possibility that this relation may be more than coincidental.

Conflict, inflation and money

Abstract: Conflict is endemic in the capitalist system and concerns all aspects of economic life : the techniques of production to be used, the length and intensity of the working day, and the distribution of income. Naturally, these are all interconnected and what happens in one sphere influences what happens in the rest, and all in some way affect the behaviour of wages and prices. So much is obvious, but, in view of the complexity of the inflationary process, the present article focuses on just one particular area, namely how conflict over the distribution of income affects the general level of prices in advanced capitalist economies. A formal model is constructed in which the following factors are combined in a coherent fashion : taxes, the terms of trade, expectations and money. In writing this article I have drawn on a wide variety of past writing on the subject of inflation, although usually without explicit acknowledgement. Amongst the works which influenced me most were: Marx's writing on the reserve army of labour, Keynes' How to Pay for the War, Maynard's Economic Development and the Price Level, Phillips' famous article on unemploy ment and wages, Wilkinson's contribution to Do Trade Unions Cause Inflation? and, finally, monetarist writing on expectations.!

Environmental Impacts: Conflicts and Trade-offs

Abstract: The trade-off between environmental goals and economic goals affects all businesses and institutions. The author considers ten specific areas of interaction between environmental and economic objectives and constraints, including inflation, capital investment costs versus pollution effects, health effects of pollution, and land use and housing densities. These and other topics are discussed in light of their present and future impacts on business and the society.

The forward exchange rate, expectations, and demand for money: the german hyperinflation

Abstract: A major difficulty in incorporating the role of inflationary expectations in empirical work has been the lack of an observable variable measuring expectations. Thus, for example, in analyzing the demand for money during hyperinflation, Phillip Cagan in his classic contribution constructed a time-series of expected inflation using a specific transformation of the time-series of the actual rates of inflation. There are two conceptual difficulties with such an approach: first, the choice of the specific transformation used to generate the series of expectations is to a large extent arbitrary; and second it assumes that expectations about future prices are based only on past and present prices. Recent empirical work that was stimulated by Cagan's pioneering study elaborated on some aspects of the estimation procedures (see Thomas Sargent and Neil Wallace; Sargent 1977; Joseph Bisignano; Paul Evans; Rodney Jacobs 1975; Mohsin Khan 1975), and the functional form (see Robert Barro 1970; Benjamin Eden 1976). The ongrowing literature concerning rational expectations (for example, John Muth 1961; Robert E. Lucas) has led to an examination of the conditions under which the adaptive expectations process is "rational" in the sense of Muth (1961). See Sargent and Wallace (1973); Sargent 1977); Benjamin Friedman (1 975a); Michael Mussa. In this paper I propose a direct measure of expectations which is then incorporated in the analysis of the demand for money during the German hyperinflation. The major virtue of the proposed direct measure is that it is not derived from a specific mechanistic formula, but rather, it reflects the expectations of economic agents as manifested in market prices. The direct measure is based on data from the forward market for foreign exchange. The plan of the paper is as follows: Section I describes the direct measure of expectations and provides evidence on the efficiency of the foreign exchange market. Section II incorporates these expectations in estimating the demand for money. The issues that are discussed in that section involve the proper functional form, the proper price deflator, the stability of the demand for money during the various phases of the hyperinflation, possible lags of adjustment and the resultant estimates of short-run and longrun demand functions, and the role of price variability and uncertainty in the specification of the demand for money. Section III deals with the issue of inflationary finance and the money supply process. In this context I examine the interrelationships between money and prices and discuss some aspects of "causality" by analyzing the time-series properties of money and prices. Section IV contains some concluding remarks. *University of Chicago and Tel-Aviv University. I am indebted to John Bilson and Rolf Banz for suggestions and efficient research assistance. In revising the paper I have benefited from numerous suggestions by Robert Barro, Phillip Cagan, Kenneth Clements, Rudiger Dornbusch, Paul Evans, Stanley Fischer, Benjamin Friedman, Milton Friedman, John Gould, Zvi Griliches, Arnold Harberger, Albert Hart, James Heckman, Edi Karni, Mohsin Khan, David Laidler, Edward Lazear, Robert Lucas, Huston McCulloch, Merton Miller, Franco Modigliani, Michael Parkin, Aris Protopapadakis, Thomas Sargent, Jose Scheinkman, Larry Sjaastad, Jerome Stein, Lester Telser, and Arnold Zellner. Financial support was provided by a grant from the Ford Foundation.

Inventory decisions under inflationary conditions

Abstract: The standard approach to inventory policy ignores the effect of inflation. This paper investigates a model that includes both inflationary trends and time discounting. The paper compares this model with the standard EOQ model and the analysis for a one-time change, found in previous literature.

The demand for money during hyperinflations under rational expectations: i*

Abstract: paradox that emerged when Cagan used his estimates of x to calculate the sustained rates of inflation associated with the maximum flow of real resources that the creators of money could command by printing money. This "optimal" rate of inflation turns out to be -l/oc. For each of the seven hyperinflations, the reciprocal of Cagan's estimate of -a turned out to be less, and often very much less, than the actual average rate of inflation. The data are shown in

Inflation, exchange rates, and the world economy

Abstract: The previous editions of this work were praised as lucid and insightful introductions to a complicated subject. This third edition incorporates major additions to update the survey while retaining its clarity. Selected from the second edition are essential chapters on developments in balance-of-payments theories, inflation and exchange rates, the international adjustment to the oil price rise, and monetary integration in Europe. In three new chapters, Corden considers the international transmission of economic disturbances, the international macrosystem, and macroeconomic policy coordination.

The Gibson Paradox and Historical Movements in Real Interest Rates

Abstract: This paper analyzes the correlation between interest rates and prices which as persisted for the past quarter of a millennium and has been termed the Gibson Paradox. Spectral techniques confirm the correlation between long-term interest rates and prices for very long-term swings (the Gibson Paradox), but indicate a significant short cycle correlation only for short-term interest rates, which we term the Kitchin Phenomenon. Past explanations of these correlations have often failed to distinguish cycle lengths and term of interest rates involved. Our analysis rejects Irving Fisher's "price expectation" explanation and the Sargent-Wicksell velocity of money explanations. We propose alternative explanations which in part relate to the characteristic behavior of governments during wartime and in part to distributional effects of unanticipated inflation. Our analysis strongly suggests that prior to World War I nominal long and short rates of interest can be regarded as real rates.

Differential Responses to Price and Exchange Rate Influences in the Foreign Trade of Selected Industrial Countries

Abstract: THE speed with which a country's imports and exports respond to exchange rate changes and inflation at home and abroad has important policy implications, but most of the work in this area has been somewhat conjectural. Some writers have pointed out that under a fixed exchange rate system, import and export flows may respond differently to price changes that result from changes in exchange rates than to those resulting from changes in national currency prices of exportable goods. Orcutt (1950, pp. 541-542) noted that trade flows may respond differently to small and temporary changes in prices than to large and fairly permanent changes, such as those caused by a devaluation. Among others, Leamer and Stem (1970, p. 34) interpreted Orcutt's point to mean that adjustment to large price changes stemming from devaluations will be more rapid than adjustment to small changes, but the long-run adjustment would be the same. Junz and Rhomberg (1973, p: 413) adduce reasons why the short-run response to a devaluation could be either faster than the response to a price change, because of the usually larger size of par value changes and the publicity that surrounds them, or slower, because of the large resource shifts necessary to correct large disequilibria that have accumulated over some period of time. The empirical evidence on the above suppositions appears inconclusive. Both T. C. Liu (1954) and Goldstein and Khan (1976) searched for evidence that trade flows responded differently to large than to small price changes. Although some of Liu' s results indicated the presence of a "quantum effect," Goldstein and Khan found that neither the size of the price elasticity nor the speed of adjustment seemed related to the size of the change in prices. Neither of these studies tested exchange -rate effects directly. The only direct test for different responses of trade flows to changes in prices and exchange rates is the 1973 study by Junz and Rhomberg. Using a pooled sample of 13 industrial countries, they concluded that the response to exchange rate changes is very similar to the response to price changes measured in local currency. The Junz-Rhomberg method, however, has certain shortcomings: they measure market-share changes, not trade flows directly; pooling the sample imposes the same parameters on each country in the pool; and measuring partial correlations with price and exchange rate variables lagged one period at a time yields no picture of the length or shape of the full response pattern through time. In this paper we estimate directly price and exchange rate response patterns, using quarterly import and export equations for six major industrial countries during the Bretton Woods period. Our results support two general conclusions: (a) the length of the full response lags on exchange rates during the fixed-rate period tended to be shorter than for changes in prices; and (b) the initial impact of exchange rate changes on trade flows tended to be greater than that of price changes.

Macroeconomic analysis and stabilization policies

Abstract: Preface 1. introduction and overview Part I. The Closed Economy: 2. Review of basic macroeconomic model 3. The formulation of a consistent macroeconomic model 4. the dynamics of the government budget constraint 5. The wage-price sector 6. A short-run integrated macroeconomic model 7. An intermediate ruin macroeconomic model 8. A long run model Part III. The Open Economy: 9. Review of static macroeconomic models of a small open economy 10. Imported inflation and government policies in a short-run open macroeconomic model 11. The dynamics of an open economy with fixed exchange rate and fixed prices 12. Imported inflation and government policies in a dynamic open macroeconomic model Part III. Stabilization Policies: 13. An introduction to stabilization theory and policy 14. Optimal stabilization theory Notes References Index.

World Inflation and Monetary Accommodation in Eight Countries

Abstract: Note: This research has been supported by the National Science Foundation. I am grateful to my colleague John Bilson for aiding me in the acquisition of data from the International Monetary Fund, and to my research assistant James Glassman for an absolutely outstanding job. Also helpful were the suggestions of Victor Argy, Jacques Artus, Jacob Frenkel, Hans Genberg, John Helliwell, Paul Krugman, David Laidler, Michael Parkin, Richard Sweeney, George Zis, and members of the Brookings panel. Of special value were a number of discussions with Christopher Sims. 1. Harry G. Johnson, "Inflation: A 'Monetarist' View," in Harry G. Johnson, Further Essays in Monetary Economics (Allen & Unwin, 1972), p. 335. 2. Nicholas Kaldor, "Inflation and Recession in the World Economy," Economic Journal, vol. 86 (December 1976), p. 710. 3. Arnold C. Harberger, "Inflation," in John Van Doren, ed., Symposium on the Emerging World Economy (Great Ideas Today series) (Encyclopaedia Britannica Educational Corporation, 1976), pp. 94-106.

Unemployment and Inflation

Abstract: For the advanced capitalist countries of the world, the 1970s have been nothing to write home about. This decade has seen a retardation of growth, widespread unemployment, sharp and persistent inflation, no end to inequalities, and much social unrest. As if all this were not bad enough, the gods on high have also seen fit to create, during these years, seven new Marxist countries, the specter of Eurocommunism, and a few more menacing national-liberation movements marching under red banners. It would seem that just when the capitalist ramparts are cracking, beyond them appears a colossus, a Goya-like giant of mean and threatening aspect. 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.

The Welfare Cost of Permanent Inflation and Optimal Short-Run Economic Policy

Abstract: At a minimum, this paper should serve as a warning against too easy an acceptance of the view that the costs of sustained inflation are small relative to the costs of unemployment If a temporary reduction in unemployment causes a permanent increase in inflation, the present value of the resulting future welfare costs may well exceed the temporary short-run gain Previous analyses have underestimated the cost of a permanent increase in the inflation rate because they have ignored the growth of the economy and therefore the growth of the future instantaneous welfare costs In the important case in which the growth of aggregate income exceeds the social discount rate, no reduction in unemployment can justify any permanent increase in the rate of inflation Quite the contrary, if the inflation rate is above its optimal level, the economy should then be deflated to reduce the inflation rate regardless of the temporary consequences for unemployment

The Welfare Implications of Uneven Inflation

Abstract: The assumption of ‘steady’ inflation has proven to be a common starting point for most welfare analysis of inflation. As defined, steady inflation has three basic properties (1) it is perfectly foreseen, so that the expected inflation rate, which alone influences behaviour, is in fact the inflation rate actually realised; (2) market institutions adjust sufficiently to accommodate the inflation; one example of such an adjustment would be the use of price-indexed contracts; other examples will be given below; (3) the effects of inflation are uniform over all commodity groups; that is, inflation causes no changes in relative prices.

Macroeconomic Effects of Selective Public Employment and Wage Subsidies

Abstract: DIRECT JOB CREATION and selective wage subsidies are policies designed to alter the mix of employment in favor of workers who, in the normal course of economic events, experience high rates of unemployment. As instruments of macroeconomic policy, these measures are intended to mitigate the conflict between society's goals for unemployment and inflation. The hope is to "cheat the Phillips curve." For the short run, as in the current cyclical recovery, this means to diminish the inflationary consequences of higher rates of employment. For the long run, it means to diminish the natural rate of unemployment-or, to use a more neutral term, the minimal nonaccelerating-inflation rate of unemployment

Price Determination Processes for Agricultural Sector Models

Abstract: Until recently, traditional subsector model analysis for agricultural products had focused largely on supply-acreage considerations. This was particularly true of the crops sector, where historically supply has outstripped demand, leaving market prices at support levels. Supply response equations often used the support price as the supply price, reducing even further the role of market prices. However, the disappearance of excess capacity from agriculture has shifted attention to the demand-price side of the ledger. Recent experience with worldwide grain price inflation and its impact on domestic livestock prices has reinforced the need to consider further the price determination mechanism for agricultural products. Traditional concern with supply response in an environment of excess capacity centered around the farm income problem, i.e., the relative decline of rural America. Analysis of this problem has been the prime concern of agricultural policy makers since the 1930s. On the other hand, high food prices have been the source of recent political concern, not only because of their direct effect on the cost of living but also because of "secondround" inflationary effects due to increased wage demands. These higher wages in turn lead to inflationary pressures of their own in the nonfood sectors of the economy. Hence, price determination is an appropriate topic for a session on econometric models since, as will be shown, the nonfarm economy plays a large role in that process. Economists, both agricultural and otherwise, have historically paid relatively little attention to the price determination process. For the nonfarm sector, the first serious effort at price modeling came from the EcksteinFromm price equation. A simplified version of macro model price behavior is as follows. Demand determines output; the difference between actual and potential output (i.e., unemployment) and lagged prices determine wages; wages and output determine prices. Various refinements of this basic approach are the mainstay of most aggregate models, although some have been revamped with a stage-of-processing model along the lines developed by Popkin. The price determination process for agricultural models can be summarized as fol-

Market structure and economic performance in the united kingdom

Abstract: Is there a relationship between market structure and economic performance in the United Kingdom? Traditional theory suggests that monopolies and oligopolies tend to have higher profits and prices than competitive industries, ceteris paribus. If this were true, there would be an important maldistribution of resources. The macroeconomic implications could be even more important; to what extent have the price policies pursued by oligopolistic industries contributed to the rate of inflation? Gardiner Means [I I] argued that firms with 'administered prices', identified as those clearly enjoying some degree of monopoly power, were primarily responsible for the inflation of the I950S in the United States because they raised prices despite the recession in an attempt to increase profit margins. This assertion rested primarily on an intensive study of particular industries with clear-cut market power (such as the steel industry). It was supported by further studies, summarized by Blair [i], which found significant differences between the pricing conduct of such industries and that of more competitive industries where prices were 'market determined'. Other research workers have looked for a positive general association between market structure and price changes across all manufacturing industries. This general relationship has been cast aside as a 'straw man', a misinterpretation of Mean's original 'administered price thesis'. We are inclined to agree with Blair's argument that 'there is no conceptual reason why price behaviour should differ significantly among unconcentrated industries that differ only in the extent to which they are unconcentrated' because in such industries the leading producers do not have discretionary control over prices. Formally, this is tantamount to specifying that a threshold level of concentration must be reached before we can expect to observe a relationship between price increases and concentration. The implied non-linearity of the relationship between market structure and performance is plausible, but the precise theoretical form of this nonlinearity has not yet been derived. Indeed, the economic theory underpinning

The Variability of Expectations in Hyperinflations

Abstract: A problem in the use of adaptive expectations as a mechanism for generating expectations of inflation is the assumption that the speed with which individuals revise their expectations is constant. The purpose of this paper is to estimate the Cagan model of the demand for money for six hyperinflation countries allowing the coefficient of expectations (which measures the response to the error between the actual and the expected rate of inflation) to vary with the level and the change in the rate of inflation. The results indicate considerable support for this particular hypothesis.

Inflation expectations: the use of qualitative survey data

Abstract: (1977). Inflation expectations: the use of qualitative survey data. Applied Economics: Vol. 9, No. 4, pp. 319-330.

The Welfare Cost of Inflation and the Role of Money as a Unit of Account

Abstract: Beginning with the work of Bailey [1], the analysis of the welfare cost of inflation has focused on the role of money as a medium of exchange and store of value. (For subsequent discussion see [2, 5, 12, 13, 17] .) Inflation is shown to generate a social loss because it increases the privately perceived cost of holding money and thus induces firms and households to economize on money balances and adopt alternative, resource-using means of arranging their transactions. The cost of inflation, from a social point of view, is the wastage of these resources, and is usually measured by an area under the demand curve for money. The optimal rate of inflation [8] is equal to minus the real rate of interest, for this is the rate that equates the privately perceived cost of holding additional money with the social cost of providing it. In contrast, much of the earlier literature on monetary economics focused on the role of money as a unit of account and standard of value, and advocated price stability as the optimal behavior of the price level.' This paper develops a formal model supporting this point of view. The central contention of the paperis that even in a perfectly anticipated, open inflation, there is an important element of social loss that is not comprehended in the usual measure of an area under the demand for money curve. This loss arises from the role of money as a unit of account and standard of value. It would arise even if no money were ever held, but money functioned solely as the unit in terms of which prices are quoted. The only

Unanticipated Money Growth And Output Fluctuations

Abstract: Almost all tests of rational expectation models have been conducted under the hypothesis of complete price flexibility. In these models, it is unanticipated inflation that causes business fluctuations. William Poole (1976] recently reviewed empirical studies of rational expectation models and concluded that they fail to explain the persistence of business cycles. 1 However, rational expectation models because of their striking theoretical implications do deserve more extensive testing. In this paper, it is shown that even without instantaneous price adjustment it is possible to have cyclical fluctuations in output arising solely from informational inadequacies. A test of this hypothesis is developed which involves looking directly at unanticipated money growth and fiscal policy. Series for unanticipated money growth and fiscal variables are calculated from time-series analysis; economic actors are taken to use all currently available time-series information for forecasting. A minor econometric innovation is a procedure for preventing future values of a stochastic process from affecting current estimates of the process that the agents use.