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 11: High inflations and contemporary monetary theory

Axel Leijonhufvud

Subjects: economics and finance, history of economic thought


11. High inflations and contemporary monetary theory In this paper, I am drawing throughout on joint work with Daniel Heyman1. Our interest is in economic behavior under conditions of extreme monetary instability, that is, in deep depressions and very high inflations. Only the inflations will be discussed in what follows. The first part of the paper describes some of the salient features of high inflations. The remainder will discuss some of the issues that high inflation behavior poses for contemporary monetary theory. VERY HIGH INFLATIONS By very high inflations, we mean inflations that are higher than ‘moderate’ but below hyperinflation. We consider an inflation to be in the ‘moderate’ range as long as the people who have to live through it generally remain content to quote the inflation rate in percentages per year. In ‘high inflations’, people measure inflation in percentages per month and consider annual figures meaningless except for historical purposes. When the effective horizon for quoting money prices or agreeing on nominal contracts falls below one month, the economy is considered to be in hyperinflation. The conventional criterion for hyperinflation since Philip Cagan’s now classic study of postWorld War I German inflation has been a rate of price rise of 50 per cent per month.2 This appears to be in rough accord with our behavioral definition. Those who would prefer having approximate numerical boundaries for our ‘high inflations’ might think of...

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