Chapter 8: Inflation
Rabin 02 chap05 2/15/04 3:46 PM Page 217 8. Inflation THE COSTS OF INFLATION Chapter 2 emphasizes how the use of money helps make production efficient and responsive to people’s wants. If we take these services seriously, we should recognize how erosion and instability of money’s purchasing power impair them. Most obviously, unanticipated price inflation redistributes income and wealth between debtors and creditors, payers and receivers of fixed incomes, and buyers and sellers of goods and services under long-term contracts. Even if inflation is anticipated, its rate and duration can hardly be allowed for accurately. (Okun, 1971 observes that steady and easily allowed for inflation is a myth; compare Dowd, 1996, p. 435; and Laidler, 1993b [1997a], p. 331.) Debtors lose if the inflation premium they pay in nominal interest rates turns out to be an overestimate, making the actual real interest rate excessive. The uncertainty inflation brings impairs accounting and economic calculation, as well as the meeting of minds between potential parties to long-term contracts. Indexing can alleviate such problems but brings difficulties of its own (see Yeager, 1983, pp. 305–26). Inflation at an extreme rate increases the costs of transactions as people try to get rid of money soon after receiving it. An observer of the Austrian scene in the early 1920s noted the constant shopping and queuing and the loss of family time to frenetic shopping expeditions. Such costs fell mainly on the humbler elements of society, since servants could do the shopping for upperclass...
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