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Department of |
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Whenever a country’s inflation rate is extremely high for a sustained period of time, its rate of money supply growth is also extremely high. German Hyperinflation, 1921-1923 See Figure 1 Recent Episodes of Rapid Inflation |
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How Money Growth Produces Inflation See Figure 2 High money growth produces high inflation. Can
Other Factors Besides Money Growth Produce and Sustained Inflation? Can
Fiscal Policy by Itself Produce Inflation? See Figure 3 High inflation cannot be driven by fiscal policy alone. Can
Supply-Side Phenomena by Themselves Produce Inflation? See Figure 4 Supply-side phenomena cannot be the source of high inflation. Summary |
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High Employment Targets and Inflation cost-push inflation: occurs because of negative supply shocks or a push by workers to get higher wages demand-pull inflation: results when policymakers pursue policies that shift the aggregate demand curve to the right Cost-Push
Inflation See Figure 5 accommodating policy: activist policy with a high employment target A cost-push inflation is a monetary phenomenon because it cannot occur without the monetary authorities pursuing an accommodating policy of a higher rate of money growth. Demand-Pull
Inflation See Figure 6 Budget Deficits and Inflation Government
Budget Constraint government budget constraint: government deficit (excess of government spending over tax revenue) must equal the sum of the change in the monetary base and the change in government bonds held by the public DEF = G – T = DMB + DB If the government deficit is financed by an increase in bond holding by the public, there is no effect on the monetary base and hence on the money supply. But, if the deficit is not financed by increased bond holdings by the public, the monetary base and the money supply increase. monetizing the debt (printing money): financing government spending by increasing the monetary base Financing a persistent deficit by money creation will lead to a sustained inflation. A deficit can be the source of a sustained inflation only if it is persistent rather than temporary and if the government finances it by creating money rather than by issuing bonds to the public. Budget
Deficits and Money Creation in Other Countries Budget
Deficits and Money Creation in the Ricardian equivalence: contends that when the government runs dificts and issues bonds, the public recognizes that it will be subject to higher taxes in the future to pay off these bonds See Figure 7 APPLICATION
Explaining the Rise in See Figure 8 See Figure 9 See Figure 10 |
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Responses to High Unemployment See Figure 11 Activist and Nonactivist
Positions Case
for an Activist Policy Case
for a Nonactivist Policy Expectations and the Activist/Nonactivist
Debate Do
Expectations Favor a Nonactivist Approach? If workers’ opinions about whether policy is accommodating or nonaccommodating matter to the wage-setting process, the case for a nonactivist policy is much stronger. Do
Expectations About Policy Matter to the Wage-Setting Process? Activist Versus Nonactivist:
Conclusions constant-money-growth-rate rule: policy rule whereby the Federal Reserve keeps the money supply growing at a constant rate APPLCIATION Importance of Credibility to Volcker’s Victory over Inflation |
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Disclaimer: pages.slu.edu is a service of Saint Louis University, Saint Louis University does not control, monitor or guarantee the information contained in these sites. For more information » |