Selected Essays of Axel Leijonhufvud
Chapter 8: Inflation and economic performance
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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