Macroeconomic Instability and Coordination

Macroeconomic Instability and Coordination

Selected Essays of Axel Leijonhufvud

Economists of the Twentieth Century series

Axel Leijonhufvud

Axel Leijonhufvud has made a unique contribution to the development of macroeconomic theory. This volume draws together his insightful essays dealing with the extremes of economic instability: great depressions, high inflation and the transition from socialism to a market economy. In several of the papers, Leijonhufvud brings a neo-institutionalist perspective to the problems of coordination in economic systems.

Chapter 8: Inflation and economic performance

Axel Leijonhufvud

Subjects: economics and finance, history of economic thought


8. Inflation and economic performance A monetary regime is defined as a system of expectations that governs the behavior of the public and that is sustained by the consistent behavior of the policy-making authorities. The effects of the great inflation on American economic performance, in my view, are very largely attributable to a change in regime. The conventional story of the welfare costs of inflation, in contrast, analyses the consequences of a rise in the rate of depreciation of real balances within an otherwise unchanged policy regime.1 In so defining the problem, it misses the boat. One important class of misallocative effects of inflation, namely those that are due to the nominal rigidity of taxes, subsidies and sundry laws and regulations, will be slighted in what follows. I do not slight their importance. They are obviously of major significance. They are avoided here, however, because in that direction lies a bottomless swamp of public finance problems, from which one could not hope to extricate oneself in half a paper. The current inflation poses problems that go to the very core of monetary theory. These problems need to be addressed, have not been addressed, and deserve priority. THE ANTICIPATED INFLATION MODEL To have a willing audience among economists for a discussion of inflation’s effects on economic performance, one must first deal with the following syllogism: Inflation is a monetary phenomenon. Money is neutral. When people adapt to it rationally, inflation...

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