Showing papers on "Inflation published in 1982"
TL;DR: This paper found evidence for the hypothesis of the Mundell-Tobin model that the expected real return component of interest rates is negatively related to the expected inflation component, which is more fundamentally an outcome of the capital expenditures process.
508 citations
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TL;DR: This paper showed that the commonly-held assumption that the 1973-74 oil price increase directly affected US and world inflation and subsequent recession is consistent with the empirical data, and they applied an extended Lucas-Varro real-income equation applied to the US, United Kingdom, Canada, France, Germany, Italy, Japan, and the Netherlands.
Abstract: New evidence shows that the commonly-held assumption that the 1973-74 oil price increase directly affected US and world inflation and subsequent recession is consistent with the empirical data. An extended Lucas-Varro real-income equation applied to the US, United Kingdom, Canada, France, Germany, Italy, Japan, and the Netherlands gives mixed results, partly because of price control and decontrol programs. Simulation experiments on the price-control variable using US data finds strong effects. Further studies can be made when consistent international data is available for the 1979-80 period. 18 references, 4 figures, 3 tables. (DCK)
452 citations
TL;DR: In this article, the authors analyzed the costs and benefits of using a local currency, with emphasis on the seigniorage foregone by using a foreign money, and proposed alternative methods of imposing discipline.
Abstract: In countries with high rates of inflation there is typically movement away from the use of the local currency. The paper analyzes the costs and benefits of using a local currency, with emphasis on the seigniorage foregone by using a foreign money. Even if it should be desirable for a country to fix its exchange rate, it still loses seigniorage if it does not use its own money. The case for using a foreign money then turns largely on the superior discipline imposed on domestic policymakers by removing their control over the money supply. Alternative methods of imposing discipline are discussed. Estimates of the amount of seigniorage raised by different governments are presented; seigniorage amounts in some cases to about 10 percent of government revenue. Estimates are also presented of both the annual flow and one-time stock costs of giving up use of domestic currencies and instead using the dollar. The flow cost is typically about 1 percent of GNP and the stock cost is around 10 percent of GNP.
367 citations
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01 Jan 1982
TL;DR: Hahn as discussed by the authors argues that the growth of the money supply is not a necessary cause of inflation, as the Monetarists have assumed, and argues that inflation is in any case not the overwhelming satanic force disrupting society and the economy that the strict Monetaristists think it to be on theoretical grounds and so many others feel it in terms of practical economic realities.
Abstract: On the basis of theoretical considerations and on the evidence of real-world economies, Frank Hahn demonstrates in unequivocal terms that Monetarism offers an implausible solution to the most pervasive economic problems. He confronts the central issue of current economic theory by making the case that the growth of the money supply is not a necessary cause of inflation, as the Monetarists have assumed. And he contends that inflation is in any case not the overwhelming satanic force disrupting society and the economy that the strict Monetarists think it to be on theoretical grounds and so many others feel it to be in terms of practical economic realities. It is the tax systems, he points out, that are the real influence at work against the economies of the industrialized nations.Frank Hahn, one of Britain's most eminent economists, is Professor of Economics at Cambridge University and author of Equilibrium and Macroeconomics (MIT Press 1985).
257 citations
TL;DR: The relationship between inflation and interest rates remains weak at the even low frequencies as mentioned in this paper, which is taken as evidence that cyclical factors or errors in measuring inflation expectations cannot account for the failure of the results to bear out Fisher's theoretical prediction, rather, comparison of real interest rates and stock market yields suggests that Fisher was correct in pointing to money illusion as the cause of the imperfect adjustment of interest rates to expected inflation.
Abstract: This paper critically re-examines theory and evidence on the relation- ship between interest rates and inflation. It concludes that there is no evidence that interest rates respond to inflation in the way that classical or Keynesian theories suggest, For the period 1860-1940, it does not appear that inflationary expectations had any significant impact on rates of inflation in the short or long run. During the post-war period interest rates do appear to be affected by inflation. However, the effect is much smaller than any theory which recognizes tax effects would predict. Further- more, all the power in the inflation interest rate relationship comes from the 1965-1971 period. Within the 1950's or 1970's, the relationship is both statistically and substantively insignificant. Various explanations for the failure of the theoretically predicted relationship to hold are considered. The relationship between inflation and interest rates remains weak at the even low frequencies. This is taken as evidence that cyclical factors or errors in measuring inflation expectations cannot account for the failure of the results to bear out Fisher's theoretical prediction. Rather, comparison of real interest rates and stock market yields suggests that Fisher was correct in pointing to money illusion as the cause of the imperfect adjustment of interest rates to expected inflation.
243 citations
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TL;DR: In this paper, the role of inventories in making prices "sticky" is studied by analyzing a dynamic linear-quadratic model of a monopoly firm facing stochastic demand, but able to store its finished goods in inventory.
Abstract: The role of inventories in making prices "sticky" is studied by analyzing a dynamic linear-quadratic model of a monopoly firm facing stochastic demand, but able to store its finished goods in inventory. It is shown that, in contrast to the usual presumption, firms that exhibit the smallest output responses to demand fluctuations may also exhibit the smallest price fluctuations. Specifically, firms which have very flexible inventory storage facilities or are subjected to very transitory demand shocks will rely on inventories as buffers, and will change neither production nor price very much. On the other hand, firms which have very inflexible storage facilities or whose demand shocks are quite permanent will display large swings in both price and output. The standard assumption about inventory carrying costs that has been used in the literature (that they are linear) is shown to imply that production is impervious to fluctuations in demand. It is also established that prices may respond more strongly to positive demand shocks than to negative ones if it is impossible to hold negative inventories (i.e., to have unfilled orders). The model offers an explanation for "stickiness" in relative prices. However, under certain circumstances, it may help explain the persistence of inflation
242 citations
TL;DR: In this article, the authors present what is known and what is hypothesized about the effects of taxation on the incentive to invest, via the cost of capital, taking full account of important issues that arise independently from the question of taxation.
Abstract: The cost of capital plays an important role in the allocation of resources among competing uses in a decentralized market system. The purpose of this paper is to organize and present what is known and what is hypothesized about the effects of taxation on the incentive to invest, via the cost of capital,taking full account of important issues that arise independently from the question of taxation. Included in the analysis is a discussion of empirical findings about the interaction of inflation and taxation in influencing the incentive to invest, and a treatment of taxation and uncertainty.
228 citations
219 citations
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TL;DR: The relationship between inflation and interest rates remains weak at the even low frequencies as discussed by the authors, which is taken as evidence that cyclical factors or errors in measuring inflation expectations cannot account for the failure of the results to bear out Fisher's theoretical prediction, rather, comparison of real interest rates and stock market yields suggests that Fisher was correct in pointing to money illusion as the cause of the imperfect adjustment of interest rates to expected inflation.
Abstract: This paper critically re-examines theory and evidence on the relation- ship between interest rates and inflation. It concludes that there is no evidence that interest rates respond to inflation in the way that classical or Keynesian theories suggest, For the period 1860-1940, it does not appear that inflationary expectations had any significant impact on rates of inflation in the short or long run. During the post-war period interest rates do appear to be affected by inflation. However, the effect is much smaller than any theory which recognizes tax effects would predict. Further- more, all the power in the inflation interest rate relationship comes from the 1965-1971 period. Within the 1950's or 1970's, the relationship is both statistically and substantively insignificant. Various explanations for the failure of the theoretically predicted relationship to hold are considered. The relationship between inflation and interest rates remains weak at the even low frequencies. This is taken as evidence that cyclical factors or errors in measuring inflation expectations cannot account for the failure of the results to bear out Fisher's theoretical prediction. Rather, comparison of real interest rates and stock market yields suggests that Fisher was correct in pointing to money illusion as the cause of the imperfect adjustment of interest rates to expected inflation.
204 citations
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203 citations
TL;DR: In this article, the authors test the three leading explanations for the correlation between government deficits and inflation and find no support for either of the first two hypotheses, nor for the third hypothesis, and conclude that expected government deficits have no significance for future inflation.
Abstract: There is a pronounced positive correlation of inflation andgovernment deficits in the United States since World War II.The purpose of this paper is to test the three leading explanationsof this correlation. These three explanations are: (a) a deficitincreases prices through a wealth effect; (b) a deficit results inthe Federal Reserve purchasing debt, thus increasing the moneysupply and prices; and (c) expected inflation increases the deficit(which is the change in the nominal value of bonds). No supportis found for either of the first two hypotheses. The results indi-cate that expected government deficits have no significance forfuture inflation.Since World War II, the United States has experienced large federal-government deficits and a sustained peacetime inflation. Three differentconnections between the deficits and inflation are prominent in theliterature.The most direct connection between government deficits and inflationis that by increasing the real value of outstanding bonds and perceived netwealth, a deficit can raise total spending and the price level. This connec-tion is also the most long-standing and is suggested by Metzler (1951) andPatinkin (1965) for example.Monetarists generally and Buchanan and Wagner (1977) in particularhave emphasized a different link between deficits and inflation. They sug-gest that the Federal Reserve purchases government bonds when the Trea-sury sells bonds, thus increasing high-powered money, the money supply,and the price level. The Federal Reserve might behave this way, for exam-ple, because it is attempting to hold down interest rates on governmentsecurities when deficits occur.Recently, Barro (1978, 1979) has put forward a hypothesis that deficitsare a result of inflation, rather than inflation being a result of deficits. Thegovernment deficit is the change in the nominal value of outstanding gov-ernment bonds. If the anticipated inflation rate increases, then the nomi-nal value of bonds must increase, i.e., the government will run a deficit, tokeep the same anticipated real amount of bonds.All three of these possible connections between government deficitsand inflation are consistent with the observed positive correlation of defi-cits and inflation. The implications, however, are strikingly different con-
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TL;DR: In this article, an empirical exploration of real interest rate movements in seven OECD countries from 1967-II to 1979-II was carried out, and the results found for the US hold up in other countries.
Abstract: How real interest rates behave over time is critical to our understanding of many macroeconomic issues, and much recent research has pursued this question Very little of the research, however, has focused on real interest rates outside the United States This paper is an empirical exploration of real interest rate movements in seven OECD countries from 1967-II to 1979-II Further research is needed on real rates in other countries for several reasons Not only are measures of foreign real rates of interest in their ownright, but extending an analysis of real rates to other countries also has the following additional benefits: it can generate more powerful statistical tests of propositions previously tested on US data and yield information on whether results found for the US hold up in other countriesThis study pursues several questions that have arisen naturally from this earlier work Is the hypothesis that the real rate is constant rejected when the analysis is extended to other countries? Does the real rate decline with increased inflation and money growth in other countries besides the United States? How reliable is the Fisher effect, in which nominal interestrates reflect changes in expected inflation? Are movements in nominal interest rates a reliable indicator of movements in real rates? What kind of variationsin real interest rates are there in different countries? Have real rates declined from the '60s to the '70s for other countries besides the US?
TL;DR: This paper examined the role of union wage contracts in the persistence of inflation and the implication of these contracts for the problem of disinflation in the United States, and developed a quantitative model of overlapping con- tracts explicitly oriented toward the major union sector.
Abstract: This paper examines the role of union wage contracts in the persistence of inflation, and the implication of these contracts for the problem of disinflation in the United States. A quantitative model of overlapping con- tracts explicitly oriented toward the major union sector is developed. The model takes account of expectations of future wage, price, and employment conditions as in more aggregated models that have been used in macroeconomic research. In addition, the distribution of workers according to contract length as well as deferred wage increases and escalator clauses are explicitly used in the model. The main aim of the model is to determine the constraints which these contracts impose on disinflation paths. The model indicates that the maximum speed of disinflation is extremely slow in the early phases -- if a rise in unemployment is to be avoided -- but increases considerably before the new lower rate of inflation is reached. The disinflation path is considerably slower than that observed after hyperinflation periods. However, the existence of a path of inflation reduction raises questions about whether the institution of union wage con- tracts is really the direct cause of costly disinflations, or whether their influence works indirectly by raising credibility problems about a monetary disinflation.
TL;DR: A review of the recent experience with stabilization programs in Latin America in the light of traditional and monetarist models of inflation and the exchange rate can be found in this article, where the authors show that the traditional view is substantially right as a long-run model, but it fails in the dynamics.
TL;DR: In this paper, an analytical model is developed to incorporate the essential characteristics of the stabilization plan implemented in Argentina in January 1979, which is based upon a set of simplifying assumptions that only approximate the complexity of the real world.
TL;DR: In this article, the effect of tax incentives on business investment in the United States in the period from 1953 through 1978 was analyzed. But the analysis focused on the investment process is far too complex for any simple econometric model to be convincing.
Abstract: This paper presents econometric evidence on the effect of tax incentives on business Investment in the United States in the period from 1953 through1978. The analysis emphasizes that the Interaction of inflation and existing tax rules has contributed substantially to the decline of business investment since the late 1960's.Because the investment process is far too complex for any simple econometric model to be convincing, I have estimated three quite different models of investment behavior. The strength of the empirical evidence rests on the fact that all three specifications support the same conclusion. More generally, the analysis and evidence show that theoretical models of macroeconomic equilibrium should specify explicitly the role of distortionary taxes, especially taxes on capital income. The failure to include such tax rules can have dramatic and misleading effects on the qualitative as well as the quantitative properties of macroeconomic theories. This paper was presented as the Fisher-Shultz Lecture at the Fourth World Congress of the Econometric Society, 29 August 1980, in Aix-en-Province.
TL;DR: This article used money-demand theory and a rational-expectations version of the quantity theory of money to study inflation in the United States during the post-Korean War period.
Abstract: This paper uses money-demand theory and a rational-expectations version of the quantity theory of money to study inflation in the United States during the post-Korean War period The major results are as follows 1 The theory and tests explain the phenomenon of stagflation, that is, the negative relation between inflation and real activity observed during the post-1953 period The analysis calls into question the many variants of the Phillips curve which presume that inflation-real activity relations are positive 2 Consistent with the models of Patinkin (1961) and Fama (1980), monthly, quarterly, and annual data indicate that the base (currency plus reserves held against deposits) is the relevant monetary variable in the inflation process and that demand deposits are irrelevant The direct policy implication is that the base is the key monetary variable in the control of inflation 3 The most convincing evidence for the simple quantity-theory view of inflation proposed here comes from the comparison of the conditional exMoney-demand theory and the quantity theory of money are used to study the inflation process As predicted by the model, monthly, quarterly, and annual data indicate that inflation is positively related to money growth rates and negatively related to growth rates of real activity The theoretical and empirical origins of stagflation are explained, and changes in monetary arrangements to simplify the control of inflation are prescribed
TL;DR: In this paper, the expected inflation and welfare in steady-state equilibrium were studied, where the demand for money is an inventory demand with an endogenous payment period, and the Clower constraint was not imposed.
Abstract: This is a paper on expected inflation and welfare in steady-state equilibrium. The demand for money is an inventory demand with an endogenous payment period--the Clower constraint is not imposed. Higher inflation reduces welfare by reducing consumption, as people devote more of their real income to maintaining lower average money holdings. High inflation does not necessarily promote an increase in the capital stock--the Mundell-Tobin effect is absent. The policy conclusion is standard: deflate at the rate of time preference. Because capital is held, socially optimal consumption falls short of its golden-rule level. If inside money is allowed, it drives out fiat money, and welfare is again at a maximum.
TL;DR: In this article, exchange rate rules in their role as macroeconomic instruments are discussed and discussed throughout from the trend part of exchange rate behaviour, a crawling peg necessitated by differences in trend inflation.
Abstract: This paper discusses exchange rate rules in their role as macroeconomic instruments. We abstract throughout from the trend part of exchange rate behaviour — a crawling peg necessitated by differences in trend inflation — and emphasise instead the implications of exchange rate rules in providing flexibility of real wages or in affecting the stability of output or prices.
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TL;DR: In this article, the authors studied the effect of inflation on the demand for housing and the after-tax cost of renting or owning a home. And they found that an increase in the rate of anticipated inflation of the general price level reduces the after tax cost of housing.
Abstract: An important tradition in economics is to assume that demand depends upon relative prices and is homogenous of degree zero. For the most part this has been interpreted as meaning inflation-changes in the price level-leaves demand unchanged. Recent work by a number of economists has challenged this position for the case of housing demand. Two arguments have been made that inflation acting in concert with existing institutions alters the quantity of housing demanded and the decision to rent or own a house. The first argument states that inflation and the standard fixed payment mortgage combine to reduce the size of the mortgage loan a household can obtain for the purpose of buying a home. This works to reduce the quantity of owner-occupied housing demanded given the importance of mortgage finance to the demand for owner-occupied housing. The second argument focuses on the inflation adjusted after-tax cost of owner-occupied housing. It simply states that an increase in the rate of anticipated inflation of the general price level reduces the after-tax cost of housing, thus increasing the demand for housing and the demand for homeownership. There has been little empirical testing of these two arguments. The purpose of this paper is to formulate and estimate a model which will give an indication of the quantitative significance of the two arguments. A housing demand equation and a tenure choice equation (own versus rent) are estimated using a sample of about 6000 households from the 1975 Annual Housing Survey [10]. The estimates suggest that inflation dampens housing demand and homeownership opportunity for most households even though the inflation adjusted after-tax cost of owner-occupied housing declines as inflation heats up. The paper consists of six sections including the introduction. Section Two examines the ways inflation affects housing choices in more detail. The third section contains the specification of the econometric model that forms the basis of the study. Section Four is a discussion of econometric problems and the data used. The results of the estimates are discussed in the fifth section. The paper concludes with a presentation of the major conclusions and policy implications of the study.
01 Jan 1982
TL;DR: Unemployment was the central economic issue of the interwar period and, while relatively full employment was sustained in the industrial countries after the Second World War, the problem of unemployment has become of increasing concern in recent years as discussed by the authors.
Abstract: Unemployment was the central economic issue of the interwar period and, while relatively full employment was sustained in the industrial countries after the Second World War, the problem of unemployment has become of increasing concern in recent years.
TL;DR: In this article, the authors proposed a method to solve the problem of the "steadystate inflation" problem in the United States by introducing the concept of "pseudo-currency".
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TL;DR: The authors report on a comprehensive study of the distributions of summary measures of error for a large collection of quarterly multi-period predictions of six variables representing inflation, real qrowth, unemployment, and percentage changes in nominal GNP and two of its more volatile components.
Abstract: This paper reports on a comprehensive study of the distributions of summary measures of error for a large collection of quarterly multiperiod predictions of six variables representing inflation, real qrowth, unemployment,and percentage changes in nominal GNP and two of its more volatile components.The data come from surveys conducted since 1968 by the National Bureau of Economic Research and the American Statistical Association and cover more than 70 individuals professionally engaged in forecasting the course of the U. S.economy (mostly economists, analysts, and executives from the world of corporate business and finance). There is considerable differentiation among these forecasts, across the individuals, variables, and predictive horizons covered. Combining corresponding predictions from different sources can result insignificant gains; thus the group mean forecasts are on the average over timemore accurate than most of the corresponding sets of individual forecasts. But there is also a moderate deqree of consistency in the relative performance of a sufficient number of the survey members, as evidenced in positive rank correlations among ratios of the individual to group root mean square errors.
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01 Jan 1982
TL;DR: In this paper, the neutrality of money and the economic costs of inflation are discussed, and a cooperative and non-cooperative approach is proposed. But, as discussed in Section 2.1, it is not a cooperative approach.
Abstract: Introduction 1. The neutrality of money 2. Informational efficiency and economic efficiency 3. Expectations and economic policy 4. The economic costs of inflation 5. Sequences of budget constraints 6. Monetary equilibrium: a cooperative approach 7. Monetary equilibrium: a non-cooperative approach Mathematical appendix Bibliographical notes References Index.
TL;DR: In this paper, the authors investigated the mechanism of stagflation in the OECD countries and found that the less favourable mix of unemployment and rate of change of inflation (which they call stagflation) is explained by a fall in the feasible rate of growth of real wages unmatched by a reduction in the constant term in Phillips curve.
Abstract: Since 1975 labour slack has been unusually high in the OECD countries, and yet inflation has not diminished. The less favourable mix of unemployment and rate of change of inflation (which we call stagflation) is explained by a fall in the feasible rate of growth of real wages unmatched by a reduction in the constant term in Phillips curve. To investigate this mechanism, conventional wage and price equations are estimated for 19 countries and then used for simulation. Stagflation has been caused in roughly equal amounts by rising relative import prices and by the fall in the rate of productivity growth. In the basic model the Phillips curve is assumed not to adapt to falls in feasible real wage growth, but in a final section an adaptive wage equation is estimated, which confirms that the process of adaptation is slow.
TL;DR: The authors introduced new measures of the mean and variance of inflation and growth expectations, based on tendency survey data from four major European economies, and found that unpredictable disturbances typically have an internal rather than an international origin.