Remembering Inflation - Hardcover

Granville, Brigitte

Hardcover

ISBN 10: 0691145407 ISBN 13: 9780691145402

Verlag: Princeton University Press, 2013

Inhaltsangabe

Why we need to heed the lessons of high inflation

Today's global economy, with most developed nations experiencing very low inflation, seems a world apart from the "Great Inflation" that spanned the late 1960s to early 1980s. Yet, in this book, Brigitte Granville makes the case that monetary economists and policymakers need to keep the lessons learned during that period very much in mind, lest we return to them by making the same mistakes we made in the past.

Granville details the advances in macroeconomic thinking that gave rise to the "Great Moderation"—a period of stable inflation and economic growth, which lasted from the mid-1980s through the most recent financial crisis. She makes the case that the central banks' management of monetary policy—hinging on expectations and credibility—brought about this period of stability, and traces the roots of this success back to the eighteenth-century foundations of modern monetary thought.

Tackling fundamental questions such as the causes of inflation and its relation to unemployment and growth, the natural rate of inflation hypothesis, the fiscal theory of the price level, and the proper goals of central banks, the book aims above all to demonstrate the dangers of forgetting the role of credibility in establishing sound monetary policy. With the lessons of the past firmly in mind, Granville presents stimulating ideas and proposals about inflation-targeting principles, which provide tools for present-day monetary authorities dealing with the forces of globalization, mercantilism, and reserve accumulation.

Über diesen Titel

Über die Autorin bzw. den Autor

Brigitte Granville is professor of international economics and economic policy at Queen Mary University of London. Her books include Sovereign Debt: Origins, Crises, and Restructuring.

Von der hinteren Coverseite

"Brigitte Granville has written a spirited and learned defense of how macroeconomic ideas can defeat inflation with sound monetary policy and inflation targeting. The success of these ideas is evident in persistently low inflationary expectations, which are now taken for granted. Yet Granville warns that monetary policy must not be overloaded because then its credibility may be undermined. Hers is a wonderfully and enlighteningly fresh look at inflation."--Anders Åslund, senior fellow, Peterson Institute for International Economics

"Granville recalls the inflation of the 1970s, which, she fears, is in danger of being forgotten in the wake of the recent financial crisis and the ongoing recession. She covers a wide swath of macroeconomics and takes in the causes of inflation, the relation between unemployment and inflation, the Phillips curve, the role of expectations, and much more. I don't know of any other book quite like this."--John Driffill, Birkbeck, University of London

"Granville has read almost everything and has a good eye for the central issues. I liked this book very much."--Thomas J. Sargent, Nobel Laureate in Economics

Aus dem Klappentext

"Brigitte Granville has written a spirited and learned defense of how macroeconomic ideas can defeat inflation with sound monetary policy and inflation targeting. The success of these ideas is evident in persistently low inflationary expectations, which are now taken for granted. Yet Granville warns that monetary policy must not be overloaded because then its credibility may be undermined. Hers is a wonderfully and enlighteningly fresh look at inflation."--Anders Åslund, senior fellow, Peterson Institute for International Economics

"Granville recalls the inflation of the 1970s, which, she fears, is in danger of being forgotten in the wake of the recent financial crisis and the ongoing recession. She covers a wide swath of macroeconomics and takes in the causes of inflation, the relation between unemployment and inflation, the Phillips curve, the role of expectations, and much more. I don't know of any other book quite like this."--John Driffill, Birkbeck, University of London

"Granville has read almost everything and has a good eye for the central issues. I liked this book very much."--Thomas J. Sargent, Nobel Laureate in Economics

Auszug. © Genehmigter Nachdruck. Alle Rechte vorbehalten.

Remembering Inflation

By Brigitte Granville

PRINCETON UNIVERSITY PRESS

Copyright © 2013 Princeton University Press
All rights reserved.

ISBN: 978-0-691-14540-2

Contents

Preface....................................................................
ix
Acronyms...................................................................
xv
CHAPTER 1 The End of a Mirage More Money Increases Inflation but Not 
Employment.................................................................
1
CHAPTER 2 Origins of Inflation Monetary, Fiscal, and Financial Links.....
33
CHAPTER 3 Ending Inflation Without Prolonged Recession Introducing 
Credibility................................................................
54
CHAPTER 4 The Coordination of Monetary and Fiscal Policy..................
93
CHAPTER 5 Who Is Voting for Low Inflation and Why?........................
125
CHAPTER 6 Monetary and Financial Stability Conflict or Complementarity...
154
CHAPTER 7 Inflation in an Open World Does That Change the Rules?.........
186
CONCLUSION Adapting to Expectations.......................................
214
References.................................................................
223
Index......................................................................
255

CHAPTER 1

The End of a MirageMore Money Increases Inflationbut Not Employment

This first chapter describes the learning trajectory that led economistsand policymakers to regard controlling inflation as a priority and to pursuethis goal of greater price stability more effectively. Starting from the finalthird of the twentieth century, the discipline of macroeconomics generatedadvances in the understanding of inflation that went on to have a powerfulimpact on the design of effective monetary policies to counter inflation. Atthe heart of these advances was the concept of the neutrality of money overthe long run as established by the classical school of economics: changesin the money supply affect nominal variables such as the general level ofprices but not real variables such as unemployment or output. Yet if moneyis neutral in the long run, this is not always the case in the short run. Realshort-term effects can be observed to result from changes in the supply ofmoney. This duality has been well described by Robert Lucas (1996: 664):

This tension between two incompatible ideas—that changes in moneyare neutral unit changes and that they induce movements in employmentand production in the same direction—has been at the center ofmonetary theory at least since Hume wrote.

Lucas is referring here to David Hume's seminal essays Of Money, OfInterest, and Of the Balance of Trade, first published in Political Discourses(1752). The fundamental importance of Hume's contribution lies in hisattack on the prevalent mercantilist school of thought and his advocacyof free trade—which had a direct influence on Adam Smith—and alsobecause in these three essays Hume articulates the key principles of theclassical school of economics. As a result, his work has been the wellspringand catalyst for most debates and controversies in monetary economics tothis day. His economic ideas have been incessantly pored over by academiccommentators. For our purposes, it is worth picking out from this vastliterature Joseph Schumpeter's examination ([1954] 1997, 276–334) of theadvances in the understanding of "value and money" during the seventeenthand eighteenth centuries. More recently Carl Wennerlind (2005)not only offered a brilliant tour of the literature but also made his owncontribution by resolving one of the most contentious controversies surroundingHume's work—namely, whether Hume misapplied the quantitytheory.

In brief, in Of Money Hume is credited with formulating the positionthat money is neutral in the long run—meaning that only the price levelwill be affected by changes in the quantity of money—but not in the shortrun. As a result, there is a time lag between an increase in the quantity ofmoney and its effects on the price level. In Of Interest Hume drew from hisanalysis of the work of his contemporaries and predecessors the conclusionthat interest rates are more a symptom of wealth than its cause, andthat the rate of interest is determined by the demand for loans and thesupply of savings rather than solely by changes in the quantity of money(Schumpeter, [1954] 1997: 331–32). In Of the Balance of Trade Hume setsthe framework of the monetary approach to the balance of payments bylinking the money supply, trade balance, and price level. His price-specieflow adjustment mechanism describes an automatic balance of paymentsadjustment process: an increase (decrease) in the money supply leads toan increase (decrease) in prices, which discourages (encourages) exportsand encourages (discourages) imports, resulting in an outflow (inflow) ofmoney that eventually decreases (increases) the price level back to its originalposition. There is therefore a "natural balance" of trade between nations.Hume's automatic flow mechanism of international trade denied any needfor governments to interfere with this "natural balance" and thus directlyopposed the position of the mercantilists.

The above quotation of Lucas evokes three centuries of controversyamong thinkers on political economy and practitioners of the moderndiscipline of economics. Successive theories have been developed to makesense of the ever-changing nature of the world economy; and ideologyhas never lain far below the surface of the resulting debates and disputes.Every time a "new" crisis shakes the world, the previously prevalent theoriesare called into question, and the old ideological battle reemerges betweenthe partisans of laissez-faire on one side and, on the other, advocates of a"managed" economy in which fiscal and monetary policy is used to tackleeconomic downturns. Each cycle of controversy in economic thought generatesideas that are more or less ephemeral (depending on the timing andintensity of the next crisis) and produce illumination or obfuscation. Progressis conditional on how much economic history is remembered—whileremembering also that history does not repeat itself. Most controversiescan be resolved by maintaining a clear view of the distinctions betweentime periods—current, short, or long; or, put another way, some phenomenaare valid either in the short or the long run—but not both. In this way andby keeping in mind also that the validity of new analysis is contingent oncurrent conditions, a unified theory can be attempted.

This chapter focuses on one particular episode in the history of macroeconomiccontroversy—namely, how a set of economic ideas shifted the generalconduct of monetary policy that had prevailed since John Hicks's interpretation(1937) of John Maynard Keynes's The General Theory of Employment,Interest and Money (1936). This "new" thinking about inflation and monetarypolicy reacted against the contemporary orthodoxy because the prevailingtheory had proved to be unsatisfactory in analyzing the changing nature ofthe economy.

Keynes's Revolution

Keynes's General Theory too had changed the way policies were conducted.It had this effect by designing a model to express "the world in...

Details zur Ausgabe

• Verlag: Princeton University Press
• Erscheinungsdatum: 2013
• Sprache: Englisch
• ISBN 10: 0691145407
• ISBN 13: 9780691145402
• Einband: Gebundene Ausgabe
• Anzahl der Seiten: 272
• Kontakt zum Hersteller: Princeton University Press; https://press.princeton.edu/books; ; 7th Floor, New South Building; PRINCETON; NJ; 8544; USA
• Verantwortliche Person: Buchbär; info@buchbaer.de; ; Weberstr. 67; Osnabrück; 49084; Deutschland