Selected Essays of Axel Leijonhufvud
Chapter 11: High inflations and contemporary monetary theory
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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