Macroeconomic Instability and Coordination
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Macroeconomic Instability and Coordination

Selected Essays of Axel Leijonhufvud

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.
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Chapter 10: On the use of currency reform in inflation stabilization

Axel Leijonhufvud


10. On the use of currency reform in inflation stabilization* A successful deceleration of inflation will not by itself promise a future of monetary stability. That requires fiscal balance over the longer run and monetary discipline in each short run. The macroeconomic literature on inflation stabilization nonetheless tends to devote more attention to the problems of bringing down the inflation rate than to those of keeping it down – perhaps because the former seem more technocratic and less fundamentally political than the latter. In attempts to stabilize very high or hyperinflations, currency reforms are frequently a component of the stabilization plans. The most common type of such reform, namely the one that simply ‘sheds zeros’ from a nominally inflated standard of value, is also of minimal interest. A second type subjects part of the stock of money (and of money substitutes) outstanding to simple expropriation or else to forced conversion into bonds of more or less long term. Such measures simplify the stabilization task if price controls have effectively prevented the price level from catching up to the stock of money that has been created. From the standpoints of individual property rights or of distributive justice, however, they will almost inevitably be arbitrary. This kind of currency reform was used in the West German stabilization following World War II, has been imposed in the Soviet Union in the past and seriously considered again in the present. Neither of these two common types of currency reform...

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