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 9: Constitutional constraints on the monetary powers of government

Axel Leijonhufvud

Subjects: economics and finance, history of economic thought


In a memorable Peanuts cartoon of quite some years ago, Peppermint Patty was shown in school struggling with a true/false examination. Her efforts to divine the malicious intent of capricious authority went something like this. ‘Let’s see, last time he had the first one False. So this time it should be True.’ ‘He wouldn’t have just one False, after a single True. So: False, False.’ ‘OK, now we’ve got True, False, False, True … ’ ‘Looks reasonable so far’, she says with a contented smile. If this sounds vaguely familiar, it may be because you read the business and financial pages. ‘This quarter should be GO, because they want interest rates down before the election.’ ‘Next quarter will be STOP again, though, because otherwise we risk a revival of inflationary psychology.’ ‘Quarter after that is probably STOP too, but then it is bound to be GO because something will have to be done about unemployment.’ ‘So, now we’ve got GO, STOP, STOP, GO … Looks reasonable so far.’ But not much farther. It is possible sometimes to muster considerable confidence in Peppermint Patty divination for the first few steps into the future. But a few more steps and it falters and then disappears altogether. You cannot build up a firm expectation of the price level in 1985 in this way. Your price-level expectations for 1990 or 1995 will be so diffuse that, if possible, you would rather not write contracts the real outcome of which will depend significantly on...

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