Showing papers on "Inflation published in 1992"
Book•
13 Nov 1992
TL;DR: In this paper, the authors discuss monetary policy with private information under perfect information and asymmetric information and changing objectives under discretion, and provide an overview of the employment and revenue motivations for monetary expansion.
Abstract: Part 1 Motives for monetary expansion under perfect information: overview the employment motive for monetary expansion the revenue motive for monetary expansion the mercantile or balance-of-payments motive for monetary expansion comparison of policy outcomes under a system of adjustable pegs with outcomes under a commonly managed currency system and its consequences for European monetary unification the financial stability motive, interest rate smoothing, and the theory of optimal seigniorage. Part 2 Asymmetric information and changing objectives under discretion: overview of models of monetary policy with private information the employment motive in the presence of a minimal information advantage about objectives an extended information advantage about central bank objectives alternative notions of credibility and reputation the politically optimal level of ambiguity. Part 3 Velocity shocks, politics, signalling, inflation persistence, and accommodation: private information about money demand and credibility partial disclosure of policy and its effect on policy outcomes why does inflation persist? - theories of monetary accommodation and of inflation cyclicality under discretion signalling and private information about the ability to commit and about objectives with time-invariant types political parties and monetary policy. Part 4 Central bank independence and policy outcomes - theory and evidence: aspects of central bank independence and their impact on policy outcomes and the distribution of inflation the measurement of central bank independence inflation and central bank independence ranking of central banks by an overall index of inflation-based central bank independence the mean and the variance of inflation, central bank credit, and central bank independence the determinants of central bank independence.
1,702 citations
Posted Content•
TL;DR: In this article, the authors compare properties of real quantities with those of price levels and stocks of money for ten countries over the last century and find that real quantities have remarkably uniform relations among real quantities.
Abstract: We contrast properties of real quantities with those of price levels and stocks of money for ten countries over the last century. Although the magnitude of output fluctuations has varied across countries and periods, relations among real quantities have been remarkably uniform. Properties of price levels, however, exhibit striking differences between periods. Inflation rates are more persistent after World War II than before, and price-level fluctuations are typically procyclical before World War II and countercyclical afterward. Fluctuations in money are less highly correlated with output in the postwar period but are no more persistent than in earlier periods. (JEL E32, E31)
920 citations
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TL;DR: In this paper, a menu-cost model is presented in which positive trend inflation causes firms' relative prices to decline automatically between price adjustments, and shocks that raise firms' desired prices trigger larger price responses than shocks that lower desired prices.
Abstract: This paper considers a possible explanation for asymmetric adjustment of nominal prices. We present a menu-cost model in which positive trend inflation causes firms' relative prices to decline automatically between price adjustments. In this environment, shocks that raise firms' desired prices trigger larger price responses than shocks that lower desired prices. We use this model of asymmetric adjustment to address three issues in macroeconomics: the effects of aggregate demand, the effects of sectoral shocks, and the optimal rate of inflation.
629 citations
TL;DR: In this article, the authors present a theoretical and empirical analysis of the relation between policies of financial repression and long-term growth, and they show that these policies reduce the growth rate of the economy.
624 citations
TL;DR: In this paper, the authors investigate whether the dynamic behavior of GNP growth, unemployment, and inflation is systematically affected by the timing of elections and of changes of governments, and they explicitly test the implication of several models of political cycles, both of the opportunistic and of the partisan type.
Abstract: This paper studies whether the dynamic behaviour of GNP growth, unemployment and inflation is systematically affected by the timing of elections and of changes of governments. The sample include the last three decades in 18 OECD economies. We explicitly test the implication of several models of political cycles, both of the "opportunistic" and of the "partisan" type. Also, we confront the implication of recent "rational" models with more traditional approaches. Our results can be summarized as follows: (a) The "political business cycle" hypothesis, as formulated in Nordhaus (1975) on output and unemployment is generally rejected by the data; (b) inflation tends to increase immediately after elections, perhaps as a result of pre-electoral expansionary monetary and fiscal policies; (c) we find evidence of temporary partisan differences in output and unemployment and of long-run partisan differences in the inflation rate as implied by the "rational partisan theory" by Alesina (1987); (d) we find virtually no evidence of permanent partisan differences in output growth and unemployment.
468 citations
TL;DR: In this article, the authors analyzed the effects of inflation on the dispersion of prices, as well as other aspects of price behavior, using disaggregated data on prices of foodstuffs in Israel during 1978-84.
Abstract: This paper analyzes the effects of inflation on the dispersion of prices, as well as other aspects of price behavior, using disaggregated data on prices of foodstuffs in Israel during 1978-84. We find that the effect of expected inflation on intramarket price variability is stronger than the effect of unexpected inflation. We show that even in times of high inflation, price quotations are not trivially short and price changes are not synchronized across firms. These facts, taken together, confirm that there is some staggering in the setting of prices. We find that the distribution of real prices is far from being uniform, as many menu cost-based models assume or conclude. In fact, as inflation increases to very high levels, this distribution is not even symmetric. When the annual inflation rate reaches 130 percent, there are equal chances of finding real prices above or below the market average, but upward deviations in the real price are further away from zero than downward ones. Furthermore, as the annu...
394 citations
TL;DR: In this paper, the authors present a model of monetary policy in which a rise in inflation raises uncertainty about future inflation, and the public does not know the tastes of future policymakers, and thus does not necessarily know whether disinflation will occur.
384 citations
TL;DR: In this article, the authors test for evidence of opportunistic "political business cycles" in a large sample of 18 OECD economies and find very little evidence of pre-electoral effects on economic outcomes, in particular, on GDP growth and unemployment.
Abstract: The purpose of this paper is to test for evidence of opportunistic “political business cycles” in a large sample of 18 OECD economies. Our results can be summarized as follows: 1) We find very little evidence of pre-electoral effects on economic outcomes, in particular, on GDP growth and unemployment; 2) We see some evidence of “political monetary cycles,” that is, expansionary monetary policy in election years; 3) We also observe indications of “political budget cycles,” or “loose” fiscal policy prior to elections; 4) Inflation exhibits a post-electoral jump, which could be explained by either the pre-electoral “loose” monetary and fiscal policies and/or by an opportunistic timing of increases in publicly controlled prices, or indirect taxes.
332 citations
Posted Content•
TL;DR: In this paper, the authors show that the U.S. postwar data are consistent with the neutrality of money and a vertical long run Phillips curve, but find evidence against the superneutrality of money, and the long run Fisher relation.
Abstract: Propositions about long run neutrality are at the heart of most macroeconomic models. Yet, since the 1970's when Lucas and Sargent presented powerful critiques of traditional neutrality tests, empirical researchers have made little progress on testing these propositions. In this paper we show that. in spite of the Lucas-Sargent critique. long run neutrality can be tested without specifying a complete model of economic activity. This is possible when the variables are integrated. In this case, permanent shifts in the historical data can be uncovered using VAR methods, and neutrality can be tested when there is a priori knowledge of one of the structural impact multipliers or one of the structural long run multipliers. In most circumstances such a priori knowledge is available. We use this framework to test four long run neutrality propositions: (i) the neutrality of money, (ii) the superneutrality of money. (iii) a vertical long run Phillips curve, and (iv) the Fisher effect. In each application, our a priori knowledge consists of a range of plausible values for the relevant impact and long run multipliers. We find that the U.S. postwar data are consistent with the neutrality of money and a vertical long run Phillips curve. but find evidence against the superneutrality of money and the long run Fisher relation. The sign of the estimated effect of money growth on output depends on the particular identifying assumption used. For a wide range of plausible identifying restrictions, nominal interest rates are found to move less than one-for-one with inflation in the long run.
321 citations
TL;DR: In this paper, it was shown that a strong Fisher effect occurs only during certain periods but not for others, and empirically evidence found no support for a short-run Fisher effect in which a change in expected inflation is associated with a change of interest rates, but supports the existence of a long-term Fisher effect where inflation and interest rates have a common stochastic trend when they exhibit trends.
310 citations
TL;DR: In this article, the authors proposed a money demand function whose arguments include inflation, real income, long-term bond yield and risk, T-bill interest rates, and learning curve weighted yields on newly introduced instruments in M1 and non-transactions M2.
Abstract: Estimated U.S. M1 demand functions appear unstable, regularly "breaking down," over 1960–1988 (e.g. missing money, great velocity decline, M1-explosion). We propose a money demand function whose arguments include inflation, real income, long-term bond yield and risk, T-bill interest rates, and learning curve weighted yields on newly introduced instruments in M1 and non-transactions M2. The model is estimated in dynamic error-correction form; it is constant and, with an equation standard error of 0–4%, variance-dominates most previous models. Estimating alternative specifications explains earlier "breakdowns," showing the model's distinctive features to be important in accounting for the data.
TL;DR: In this paper, the main policy and analytical issues related to currency substitution in developing countries are discussed, including whether currency substitution should be encouraged or not, how the presence of currency substitution affects the choice of nominal anchors in inflation stabilization programs, the effects of changes in the rate of growth of the money supply on the real exchange rate, and the interaction between inflationary finance and currency substitution.
Abstract: This paper reviews the main policy and analytical issues related to currency substitution in developing countries. The paper discusses, first, whether currency substitution should be encouraged or not; second, how the presence of currency substitution affects the choice of nominal anchors in inflation stabilization programs; third, the effects of changes in the rate of growth of the money supply on the real exchange rate; fourth, the interaction between inflationary finance and currency substitution; and, finally, issues related to the empirical verification of the currency substitution hypothesis.
Posted Content•
TL;DR: In this article, the authors show that the U.S. postwar data are consistent with the neutrality of money and a vertical long run Phillips curve, but find evidence against the superneutrality of money, and the long run Fisher relation.
Abstract: Propositions about long run neutrality are at the heart of most macroeconomic models. Yet, since the 1970's when Lucas and Sargent presented powerful critiques of traditional neutrality tests, empirical researchers have made little progress on testing these propositions. In this paper we show that. in spite of the Lucas-Sargent critique. long run neutrality can be tested without specifying a complete model of economic activity. This is possible when the variables are integrated. In this case, permanent shifts in the historical data can be uncovered using VAR methods, and neutrality can be tested when there is a priori knowledge of one of the structural impact multipliers or one of the structural long run multipliers. In most circumstances such a priori knowledge is available. We use this framework to test four long run neutrality propositions: (i) the neutrality of money, (ii) the superneutrality of money. (iii) a vertical long run Phillips curve, and (iv) the Fisher effect. In each application, our a priori knowledge consists of a range of plausible values for the relevant impact and long run multipliers. We find that the U.S. postwar data are consistent with the neutrality of money and a vertical long run Phillips curve. but find evidence against the superneutrality of money and the long run Fisher relation. The sign of the estimated effect of money growth on output depends on the particular identifying assumption used. For a wide range of plausible identifying restrictions, nominal interest rates are found to move less than one-for-one with inflation in the long run.
01 Sep 1992
TL;DR: In this paper, the authors interpreted the evidence on stopping high inflation in terms of an analytical framework and showed that by using the exchange rate as the nominal anchor, hyperinflations have been stopped almost overnight with relatively minor output costs.
Abstract: The evidence on stopping high inflation is interpreted in terms of an analytical framework. The evidence suggests that, by using the exchange rate as the nominal anchor, hyperinflations have been stopped almost overnight with relatively minor output costs. In contrast, exchange rate-based stabilizations in chronic-inflation countries have typically resulted in a sluggish adjustment of the inflation rate, sustained real appreciation of the domestic currency, current account deficits, and an initial expansion in economic activity followed by a contraction. These stylized facts are shown to be consistent with the predictions of a staggered-prices, cash-in-advance model.
TL;DR: This paper showed that real stock prices do not show the relation to long-term interest rates that a simple rational expectations present value model would imply, and that stock prices drop when longterm interest rate rise more than would be implied by this vector autoregression model.
TL;DR: In this paper, the authors investigated domestic price determination in Denmark using three kinds of macroeconomic explanations: (1) internal labor market theories describing the relation between price and wage inflation, (2) pure monetarist theory describing the effect of excess money on the inflation rate, and (3) external theories described the foreign transmission effects on a small open economy.
01 Jan 1992
TL;DR: It is often argued that a well-functioning system of financial markets has beneficial effects for countries in the early stages of industrialization (Gerschenkron (1962), Cameron (1967), McKinnon (1973), Shaw (1973) and Fry (1988) as mentioned in this paper. But while some moves in the direction of financial liberalization have taken place (for example, in Chile and Argentina), financial repression associated with high reserve requirements and/or deposit interest rate ceilings is still widespread in developing countries.
Abstract: It is often argued that a well-functioning system of financial markets has beneficial effects for countries in the early stages of industrialization (Gerschenkron (1962), Cameron (1967), McKinnon (1973), Shaw (1973), Fry (1988)). Specifically, the development of a banking system has been viewed as playing a central role in determining both short-term real growth rates and long-run levels of output in such economies. It is also often suggested that the primary impediment to the development of an intermediary sector is legislative. In particular, government policies associated with 'financial repression' hinder the development of banks, and promote self-financed investment and investment financed through 'informal' (and presumably inefficient) money markets. These arguments raise the possibility that the 'liberalization' of financial markets in developing countries can yield substantial benefits in the form of increased output. Nevertheless, while some moves in the direction of financial liberalization have taken place (for example, in Chile and Argentina), financial repression associated with high reserve requirements and/or deposit interest rate ceilings is still widespread in developing countries. It has been recognized that such 'repressive' policies have some justification in economies where the government is forced to monetize a sustained deficit. In particular, the kinds of arguments offered by Nichols (1974), Bryant and Wallace (1984), Villamil (1988), and Cooley and Smith (1990) can be applied to developing countries to suggest that efficient use of the inflation tax will typically involve some legal restrictions to 'augment' the demand for money. This reasoning implies that developing countries face a trade-off in the use of reserve requirements and interest rate ceilings: output losses from the use of such instruments must be weighed against benefits derived from more efficient use of the inflation tax. And indeed, analyses like that of McKinnon and Mathieson (1981), Courakis (1987), and
TL;DR: In this article, the authors examined the welfare cost of inflation in an economy where agents hold money in order to smooth consumption in the face of income variability for which there is no insurance.
TL;DR: In this article, the authors investigated the relationship between inflation and long-run growth and presented an endogenous growth model that illustrates the channels through which inflation affects growth, highlighting the effects of inflation on the productivity of capital and the rate of capital accumulation.
TL;DR: In this paper, a simple model is presented in which dollarization reflects the costs that are involved in switching the currency denomination of transactions, and the transaction costs of dollarization define a band for the inflation differential within which there will be no incentive to switch between currencies.
Abstract: Since the 1970s, a number of high-inflation Latin American countries have experienced persistent "dollarization." To interpret some of the stylized facts, a simple model is presented in which dollarization reflects the costs that are involved in switching the currency denomination of transactions. The transaction costs of dollarization define a band for the inflation differential within which there will be no incentive to switch between currencies. Above the upper value of the band, the local currency gradually disappears as the economy becomes fully dollarized; below the lower value, de-dollarization occurs.
01 Jun 1992
TL;DR: In this paper, the output costs of disinflation are estimated using data for industrial countries, and the credibility of a preannounced path for money consistent with the lowest output loss is considered, and an alternative, more credible policy may be to announce an exchange rate peg to a low-inflation currency.
Abstract: The focus of this analysis is on the output costs of disinflation. A model of inflation with both forward and backward elements seems to characterize reality. Such an inflation model is estimated using data for industrial countries, and the output costs of a disinflation path are calculated, first analytically in a simple theoretical model, then by a simulation of a global, multiregion empirical model. The credibility of a preannounced path for money consistent with the lowest output loss is considered. An alternative, more credible policy may be to announce an exchange rate peg to a low-inflation currency.
TL;DR: An overview of the Bretton-woods experience can be found in this article, where the authors analyze its performance relative to other international monetary regimes and conclude that it was the most stable regime for nominal and real variables in the past century.
Abstract: This paper presents an overview of the Bretton Woods experience. From an historical perspective. I analyze its performance relative to other international monetary regimes. its origins. its operation. its problems and its demise. In the survey I emphasize both issues deemed important at the time and raise questions which may be of interest for the concerns of the present. Part 2 compares the macro performance of Bretton Woods with preceding and subsequent monetary regimes. The descriptive statistics on nine key macro variables point to one startling conclusion -- the Bretton Woods system. in its full convertibility phase 1959-1971, was the most stable regime for both nominal and real variables in the past century. Part 3 surveys the origins of Bretton Woods: the perceived problems of the inter war period; the plans for a new international monetary order and the steps leading to the outcome -- the Articles of Agreement. Part 4 examines the preconvertibility period from 1946 to 1958: the problems in getting the system started including the dollar shortage and the weakness of the IMF; and how the system evolved to convertibility and the gold dollar standard. Part 5 analyzes the heyday of Bretton Woods 1959 to 1971 in the context of the gold dollar standard and the famous three problems: adjustment. liquidity, and confidence. Part 6 considers the emergence of a "de facto" dollar standard in 1968 and its collapse in the face of a massive U.S. induced inflation. Part 7 considers why Bretton Woods was so stable and yet so short-lived. It also considers the importance of adherence to credible rules in the design of an effective international monetary system.
TL;DR: In this paper, the authors studied the solvency of Indian public sector and the eventual monetization and inflation that would be implied by stabilization of the debt-GNP ratio in the absence of changes in the primary deficit.
01 May 1992
TL;DR: In this article, the main policy and analytical issues related to currency substitution in developing countries are discussed, including whether currency substitution should be encouraged or not, how the presence of currency substitution affects the choice of nominal anchors in inflation stabilization programs, the effects of changes in the rate of growth of the money supply on the real exchange rate, and the interaction between inflationary finance and currency substitution.
Abstract: This paper reviews the main policy and analytical issues related to currency substitution in developing countries. The paper discusses, first, whether currency substitution should be encouraged or not; second, how the presence of currency substitution affects the choice of nominal anchors in inflation stabilization programs; third, the effects of changes in the rate of growth of the money supply on the real exchange rate; fourth, the interaction between inflationary finance and currency substitution; and, finally, issues related to the empirical verification of the currency substitution hypothesis.
TL;DR: In this article, the authors examine how inflation affects efficiency and output in monopolistically competitive search markets and show that the most important effect of inflation is how it alters the distribution of real transactions prices.
Abstract: This paper examines how inflation affects efficiency and output in monopolistically competitive search markets. It formalizes the conventional wisdom linking higher inflation, price dispersion, and increased resources devoted to search. It also brings to light the induced exit of Arms, which reduces rent dissipation. But the most important effect of inflation is how it alters the distribution of real transactions prices. Whether this reduces or promotes efficiency and output is shown to depend critically on preferences and market structure, and especially on whether search costs are large or small relative to consumer surplus.
TL;DR: In this article, the authors investigated the feasibility of a monetary policy aimed at pegging the nominal rate of interest and showed that under general conditions such a policy would produce the well-known cumulative process, despite the fact that there exists a well-behaved rational expectations equilibrium with no tendency for inflation to accelerate or decelerate.
Abstract: This paper investigates the feasibility of a monetary policy aimed at pegging the nominal rate of interest. It shows that under general conditions such a policy would produce the well-known cumulative process, despite the fact that there exists a well-behaved rational expectations equilibrium with no tendency for inflation to accelerate or decelerate. The cumulative process shows up as the failure of learning to converge to rational expectations. Specifically, the paper shows, first in a conventional IS-LM model with an expectations-augmented Phillips curve and then in a micro-based finance constraint model, that if people follow any learning rule based on experience that satisfies a weak condition, then the sequence of temporary equilibria under a policy of interest pegging cannot converge. The nonconvergent path that will be observed accords with the familiar cumulative process, in that inflation accelerates if the market rate of interest has been pegged below the natural rate.
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TL;DR: In this paper, the authors trace the development of the classical analysis of money and prices as an integral part of the "surplus" approach to value and distribution in the market economy.
Abstract: It has been my intention in this work to trace the development of the classical (and Marxian) analysis of money and prices as an integral part of the ‘surplus’ approach to value and distribution in the market economy. Although the conventional interpretation suggests that this analysis implies a quantity theory of money, I have attempted to show that, in contrast with neoclassical analysis, the classical account of inflation treats the price level as an independent variable in the equation of exchange. It is only in the short run that quantity theory can have any relevance to classical economics; and this, I have argued, is due to its treatment not just of money and prices but also of output.
TL;DR: The authors compared the conduct and performance of monetary policy in six industrialized countries since the break-up of the Bretton Woods system and found that central banks adopt money growth targets when inflation threatens to get out of control.
Abstract: Using a simple case study approach, this paper compares the conduct and performance of monetary policy in six industrialized countries since the breakup of the Bretton Woods system. Our purpose is to develop fruitful hypotheses that might usefully be explored in subsequent, more formal research. From a positive perspective, a frequently observed pattern in the case studies is that central banks adopt money growth targets when inflation threatens to get out of control. Central banks appear to use money growth targets both as guideposts for assessing the stance of policy and as a means of signaling their intentions to the public; however, no central bank adheres strictly to targets in the short run. More normatively, the case studies also suggest that money growth targets might be useful in providing a medium-term framework for monetary policy, if the targeting is done in a clear and straightforward manner and if targets can be adjusted for changes in the link between target and goal variables. It appears t...