Showing papers on "Inflation published in 1980"

An Analysis of Variable Rate Loan Contracts

Abstract: THE 1970s heralded times of rapid and intense inflation accompanied by high and volatile interest rates. While there have been many economic consequences attributable to these factors, perhaps most strongly affected have been the various markets and institutions dealing with fixed income securities. One reaction has been the introduction of variable rate loans. Floating rate corporate notes were first introduced in 1974 when a total of $1.3 billion were sold. Variable rate mortgages probably originated in the 1930s in the United Kingdom and Canada. Until recently they were restricted in this country. In these contracts the interest due is determined by currently prevailing rates and not the rates which were in force at the time of issuance. The purpose of this design is to stabilize the price or value of the contract-immunizing it against changes in interest rates. This paper presents a preliminary analysis of some aspects of variable rate loan contracts. Section II reviews a recently developed pricing model for the term structure of interest rates. Section III begins the discussion on variable rate loans by outlining the construction of various default-free contracts which offer perfect immunization. Section IV discusses some typical modifications found in existing variable rate contracts. In this section the price and risk of these modified contracts are determined in various examples. Finally Section V examines the changes required for variable rate contracts when there is the risk of default.

Stabilization Policy Ten Years After

Abstract: WHEN the Brookings panel first met ten years ago, the U.S. governments managers of aggregate demand were cooling an economy suffering from an inflation 4 points higher than ten years before. The unemployment rate was 4.5 percent. Four years later, at the time of the panel's thirteenth meeting, the demand managers were cooling an economy suffering from an inflation 6 points higher still. The unemployment rate was 5 percent. As the panel meets today, the government's managers of aggregate demand are cooling an economy suffering from an inflation 7 points higher than ten years before. The unemployment rate is 7 percent and rising. Higher inflation, higher unemployment-the relentless combination frustrated policymakers, forecasters, and theorists throughout Lhe decade. The disarray in diagnosing stagflation and prescribing a cure makes any appraisal of the theory and practice of macroeconomic stabilization as of 1980 a foolhardy venture. The patent breakdown of consensus spares me the task of seeking and describing collective views. I will just give my own observations and confess my own puzzlements. In one respect demand-management policies worked as intended in the 1970s. On each of the occasions I described at the beginning, the man-

Disequilibrium Estimates for Consumption Goods Markets in Centrally Planned Economies

Abstract: The centrally planned economies (CPEs) are said to suffer from sustained, significant repressed inflation (Grossman (1966); Bush (1973)). With stable official prices, visitors observe queues, shortages, and black market activity, and the East European press reports these phenomena in circumstantial detail. Scholars cite such anecdotal evidence and generalize from it (Katsenelinboigen (1977)). The literature stresses "overfull employment" or "taut" planning (Holzman (1956); Hunter (1961)), "planners' tension ", "pressure" (Levine (1966)) or "suction" (Kornai (1971)); use of the consumer sector as a buffer to absorb unforeseen shocks; overfulfilment of the wage fund plan and underfulfilment of the real wage plan; "excessive" household savings; the rising subsidies required to maintain fixed prices (Garvy (1975)); quality deterioration, and "hidden" price increases. This is a fundamental proposition in the conventional wisdom about CPEs. We view it, however, as a hypothesis about macroeconomic relationships in CPEs drawn originally from unsystematic observation, which we are now able to test systematically against aggregate time-series data. This is our objective here. We do not doubt that there is excess real demand within the state production sector in CPEs, in part imposed consciously by the planners to elicit more output. Nor do we question that this could generate excess demand in the markets linking the state production sector to the household sector: the markets for consumer goods and services and for labour (Kornai (1978) so argues, although he focuses on the state production sector). But for these markets the planners have always stressed the importance of macroeconomic equilibrium because the effects of excess demand here are so clearly dysfunctional (disincentives to labour supply, black markets, weakening of "labour discipline", etc.). The "balance of money incomes and expenditures of the population" (BMIEP) is a key element in the planning process, and the planners dispose of powerful policy instruments to achieve its targets (Portes (1977); Rudcenko (1978)). Again, we do not question that there are numerous chronic and substantial microlevel disequilibria: excess demands for certain goods (housing, meat, automobiles, and many varieties-especially those of higher quality-of other goods at a more disaggregated level), but also well-publicized excess supplies of others (e.g. low-quality clothing often accumulates in "immobile ", "unsaleable" stocks). That relative prices are distorted is hardly surprising or controversial, however, when all consumer prices, at the finest level of

Exchange Rate Rules and Macroeconomic Stability

Abstract: This paper discusses exchange rate rules in their role as macroeconomic instruments Two quite different approaches are pursued The traditional view is that exchange rate flexibility is a substitute for money wage flexibility so that managed money and managed exchange rates yield the necessary instruments for internal and external balance An entirely different perspective is offered by the modern macro-economics of wage contracting and the long run trade-off between the stability of output and the stability of inflation In this context it is shown that exchange rate policies that seek to maintain real exchange rates or competitiveness do stabilize output but do so at the cost of in-creased inflation instability Exchange rate rules such as full purchasing power parity crawling pegs are the analogue of full monetary accommodation of price disturbances

An Economic Theory of Monetary Reform

Abstract: Agents' beliefs in the imminent reform of a particular money supply process can have a powerful effect on their predictions of such variables as the rate of inflation. To find a criterion for monetary reform, we argue that any money supply process which does not provide a finite solution for price in a Cagan-type hyperinflationary money market will be rejected by the public. Such a process does not have the basic property of money which we call "process consistency," and we suggest that agents' subjective probabilities that their money is "process consistent" are identical to the probability that they attach to a currency reform. We compute agents' subjective probabilities that a particular money supply process is process consistent for the explosive part of the German hyperinflation, and we find that the probability of process consistency reached its lowest level in the very week in which the reform started.

Inflation Uncertainty and the Phillips Curve: Some Empirical Evidence

Abstract: The coincidence of high rates of unemployment and high rates of inflation, seemingly apparent in several countries for sustained periods of time, has led to a rethinking of the Phillips curve. One explanation for the appearance of a positive association between unemployment and inflation, advanced by Milton Friedman in his Nobel lecture, involves an observed linkage between the level and the variability in inflation. This note is an attempt to test whether inflation uncertainty, which should be related to variability, could explain the observed patterns of inflation and employment. It is shown that inflation uncertainty is negatively related to employment, and that failure to consider uncertainty of inflation can obscure the effect of inflation forecast errors on employment.

Inflation, the Stock Market, and Owner-Occupied Housing

Abstract: This paper suggests that to a large extent the increases in the value of housing and decreases in the value of corporate capital may have a common explanation, the inter- action of inflation and a nonindexed tax system The acceleration of inflation has sharply increased the effective rate of taxation of corporate capital income, while reducing the effective taxation of owner- occupied housing These changes have been capitalized in the form of changing asset prices In the long run, they will lead to significant changes in the size and composition of the capital stock The first section of the paper describes in more detail the nonneutralities caused by inflation A simple model showing how inflation and taxation interact to determine asset prices is presented in the second section The third section presents some crude empirical tests suggesting that increases in the expected rate of inflation may account for a significant part of the asset price changes which have been observed A final section concludes the paper by commenting on some implications of the results

Rational Expectations and Economic Policy

Abstract: "Several areas in economics today have unprecedented significance and vitality. Most people would agree that stabilization policy ranks with the highest of these. Continuing inflation and periodic serious acceleration of inflation combined with high and secularly rising unemployment combine to give the area high priority. This book brings us up to date on an extremely lively discussion involving the role of expectations, and more particularly rational expectations, in the conduct of stabilization policy. . . . Anyone interested in the role of government in economics should read this important book."—C. Glyn Williams, The Wall Street Review of Books "This is a most timely and valuable contribution. . . . The contributors and commentators are highly distinguished and the editor has usefully collated comments and the ensuing discussion. Unusually for a conference proceedings the book is well indexed and it is also replete with numerous and up-to-date references. . . . This is the first serious book to examine the rational expectations thesis in any depth, and it will prove invaluable to anyone involved with macroeconomic policy generally and with monetary economics in particular."—G. K. Shaw, The Economic Journal

Inflation Expectations and Money Growth in the United States

Abstract: While inflation expectations have recently come to play a major role in both macroeconomic theorizing and stabilization-policy analysis, relatively little work has been done to date on testing models that purport to explain how forecasters form inflation anticipations. This paper attempts to begin to fill that lacuna by exploiting data on expected inflation recently published by John Carison (1977a). These data are briefly described in Section I. Section II examines the relationship between inflation expectations and a number of factors commonly believed to influence the actual rate of inflation, such as the money growth rate, a number of fiscalpolicy-related variables, and the unemployment rate. Also considered is the question of whether the expectations generating process has "shifted" over time. Section III examines the question of whether forecasters efficiently employ available information in generating inflation predictions. The final section summarizes the results and considers the policy-related implications.

A Model of Wage-Price Inflation

Abstract: This paper reports the results of estimating a simple three equation model of wage-price inflation, where the endogenous variables to be explained have been taken to be the index of retail prices, the index of weekly wage rates, and the official average earnings index. These three variables were chosen to be explained together, firstly to avoid the choice as to whether the wage rates index or the average earnings variable should represent the labour cost variable, and secondly to allow the alternatives of using hourly wage rates, weekly wage rates, and the appropriately adjusted average earnings for the various exogenous variables (such as overtime working) to be resolved empirically. The price equation has been fully discussed already in a previous paper (1976) and will only briefly be discussed here. The wage and earnings equations were estimated by OLS, 2SLS and FIML methods using an eclectic approach to previous explanations of these variables. The form of the model estimated here is a development of that used by Espasa (1973), but also explores some hypotheses suggested by Johnston and Timbrell (1973) and Parkin etal (1976). In the discussion of the wage equation by Espasa he noted that the rate of change of the wage index could be significantly related to the real wage rate (with interpretation as in Sargan (1964)), but also to the ratio of average earnings to the wage rate index, with a possible interpretation that if earnings are high compared with the wage rate then activity is high, and also workers try to consolidate their temporary prosperity by incorporating the higher level of earnings into the basic wage rate. Alternatively the interaction between earnings and wage rates can perhaps be regarded as an inadequate and aggregated representation of the battle of the differentials. Previous work has attempted to build disaggregated models of the labour market in which each occupational group of workers responds to differentials between their own wage level and those of other groups of workers, for example the work by Vernon reported in Sargan (1971). Each macrovariable can be regarded as a differently weighted aggregate of the underlying microwage-variables, and the dynamic models which are estimated for the macro-variables represents an empirical attempt to represent the complex dynamics of the micro-model. Following the previous work by Johnston and Timbrell (1973) it was decided to explore the use of the income tax retention rate as a variable in the wage equation. It was also decided following Parkin et al (1972), (1976), to explore the use of expected rates of price inflation. The equations were initially estimated using single equation estimators, but were re-estimated by simultaneous equation system estimators. All the equations in this paper are in log linear form with the symbols representing the logarithms of the economic variables. The most general form of wage equation used can be summarized as

Government Deficits and the Inflationary Process in Developing Countries

Abstract: Publisher Summary This chapter discusses the relationship between increases in the money supply and inflation in four developing countries. It is shown that these two variables are linked in a two-way relationship. A model is then designed that explicitly introduces the link in the form of the reactions of the government fiscal deficit to inflation. The lags in government expenditures and revenues, on which the link basically hinges, are not imposed a priori but are estimated within the model. Furthermore, while previous applications of this type of model have been restricted to countries experiencing rapid inflation, this study considers a group of countries that have had considerable variety in their experience with inflation. While the basic phenomenon may well be accentuated in countries with high inflation rates, the model would be equally applicable to developing countries with moderate rates of inflation. The countries examined are Brazil, Colombia, the Dominican Republic, and Thailand.

Energy Prices, Inflation, and Recession, 1974-1975

Abstract: The rapid escalations of energy prices, in late 1973 and early 1974 and again in mid- and late-1979, have had major adverse impactson the U.S. economy. The energy price shock of 1973-1974 played a dominant role, by most accounts, in bringing about the deep recession and high inflation of the mid-1970s. In the most recent period, the full impact is yet to be seen, but it does not appear to be minor.In a previous paper published in this journal, (volume 1, number 2, April 1980), we presented the results of our efforts to quantify the economic impact on the U.S. economy of the July 1979 oil price increases;in that paper, we provided only a summary explanation of the model on which these results were based.

Inflation, the Stock Market, and Owner-Occupied Housing

Abstract: This paper suggests that to a large extent. the increases in the value of housing and decreases in the value of corporate capital may have a common explanation, the inter- action of inflation and a nonindexed tax system. The acceleration of inflation has sharply increased the effective rate of taxation of corporate capital income, while reducing the effective taxation of owner- occupied housing. These changes have been capitalized in the form of changing asset prices. In the long run, they will lead to significant changes in the size and composition of the capital stock. The first section of the paper describes in more detail the nonneutralities caused by inflation. A simple model showing how inflation and taxation interact to determine asset prices is presented in the second section. The third section presents some crude empirical tests suggesting that increases in the expected rate of inflation may account for a significant part of the asset price changes which have been observed. A final section concludes the paper by commenting on some implications of the results.

Capitalism, conflict, and inflation

Abstract: The essays collected in this volume form the basis of Bob Rowthorn's justly deserved reputation as the most original of the generation of Marxist economists which emerged in Britain in the sixties and early seventies. Bob Rowthorn says that the common thread to the theoretical and empirical papers is 'their emphasis on the importance of power and conflict in capitalist societies'. Perhaps more significantly they represent a major contribution to the attempt to develop Marxist economics as a way of understanding the present. This involves a critique both of the recent critics of Marxism (notably the Sraffans) and of the fundamentalist Marxists (for example, Ernest Mandel).

Taxes, Inflation, Speculation and the Cost of Homeownership*

Abstract: This article formulates a measure of the cost of homeownership which accounts for (1) the tax subsidy to homeowning, (2) the element of expected inflation in mortgage interest rates and (3) speculation about appreciation in real house prices. Each component of the total cost of homeowning is estimated annually across the decade of the 1970s. Total real costs are found to have trended down during the period, primarily because of a decline in the real interest rate and increases both in the real tax subsidy and in expectations of real appreciation.

Energy Price Increases and Macroeconomic Policy

Abstract: The 1979 oil price increases accounted for only a portion of the high inflation rate; the major contributing factors being past policies of monetary and fiscal expansion, unemployment, and other constraints on the economy. A macroeconomic policy which responds to energy price increases must, therefore, first identify and separate out the appropriate shocks before it can derive an appropriate accommodation. At issue is both the optimal rate and the extent of that accommodation. An attempt to reconcile three alternative frameworks for analyzing macroeconomic policy and design an optimal adjustment policy concludes that the best model is one which allows the goods market to clear and real wages adjust. 19 references, 6 figures. (DCK)

The Forward Exchange Rate, Expectations, and the Demand for Money-The German Hyperinflation: Comment

Abstract: As Phillip Cagan pointed out, hyperinflation provides the opportunity to study monetary phenomena in a situation where increases in nominal quantities dwarf changes in real quantities. The large changes in prices, moreover, surely create sizeable incentives to predict as well as possible the changes in these prices. Thus a central feature of a model of asset supply and demand in hyperinflation is the way in which agents are assumed to form their expectations. In a recent article in this Review, Jacob Frenkel proposed to infer from the data on spot and forward deutsche mark exchange the onemonth future rate of inflation expected in Germany during the post-World War I hyperinflation. The major virtue of such an approach, suggested Frenkel, was that it depended on observable market prices rather than mechanistic formulae to generate agents' guesses as to the opportunity cost of holding money. Frenkel based his conclusion that foreign exchange data could be used to measure inflation expectations on evidence that during the hyperinflation the market in deutsche mark exchange functioned efficiently. He based his conclusion that exchange markets were efficient on his estimates of two regressions:

Institutional Economics: The Changing System

Abstract: * Preface *1. Introduction * Part I. Institutional Theory And Comparative Theory *2. The Institutional Theory of Economic Progress: Technology and Institutions *3. The Value Theory of Institutional Economics *4. Other Concepts of Value * Appendix. The Possibility of Maximization *5. Microeconomics and Decision Making * Appendix. Decision Making and Price Theory *6. Macroeconomics and Decision Making *7. Dynamic Economic Process *8. Marxian and Other "Radical" Theories * Part II. Research Methods *9. Research Methods * Part III. Case Studies And Policy *10. The Institution of Property *11. The Limited-Liability Corporation *12. Government and Business *13. The Multinationals *14. The Energy-Ecology "Crisis" of the 1970s *15. The Monetary System *16. Inflation *17. The Job Guarantee *18. The Larger Picture * Index

Financial Intermediation and Economic Growth in Less Developed Countries: A Theoretical Approach*

Abstract: In stressing the importance of financial intermediation in the development of the LDCs, neither the approach of financial deepening nor that of real interest rates has clarified the relationship between financial intermediation and real development. This paper shows - within a two-sector model, but extendable to the n-sector case - that high (eguilibrium) real interest rates are growth-promoting, even if total real savings is interest insensitive (a controversial empirical question), because they bring about an improvement in the quality of the capital stock in a well-defined sense. The analysis also has implications for the theories of inflation and income distribution in the LDCs.

Are Market Forecasts Rational

Abstract: This paper conducts tests of the rationality of both inflation and short-term interest rate forecasts in the bond market. These tests are developed with the theory of efficient markets and make use of security price data to infer information on market expectations.(This abstract was borrowed from another version of this item.)

Inflation in Theory and Practice

Abstract: THE ECONOMIC EXPERIENCE of the past decade has confirmed the limitations of stabilization policy for slowing inflation. The two recessions of the decade revealed how costly it is to stop an entrenched inflation by creating economic slack. Two episodes of massive increase in energy prices exposed the vulnerability of the average price level to exogenous supply shocks. And the economy's performance throughout the decade frustrated attempts to combine price stability with goals for high employment hat are conventionally accepted and that are based on observations of the labor market. The failure to stop inflation during the past ten years contrasts starkly with the success achieved in reducing unemployment during the 1960s. As a consequence, professional macroeconomics has been in ferment throughout the past decade. In contrast to the broad consensus that existed ten years ago about stabilization, today there is substantial disagreement about how to deal with inflation and about the costs of alternative strategies for slowing it. The predominant way of thinking about this problem is based on an economy with quantity-adjusting markets and involuntary cyclical unemployment. Within this neo-Keynesian model of the macroeconomy, a Phillips curve represents the short-run response of wage inflation to cyclical variations in unemployment. Most prices are largely determined by the costs of inputs, the most important of which is labor. But the response of the average price level to cyclical fluctuations is magnified by the movement of volatile raw materials prices and by a