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Remembering Inflation

Brigitte Granville
Copyright Date: 2013
Pages: 232
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  • Book Info
    Remembering Inflation
    Book Description:

    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.

    eISBN: 978-1-4008-4644-3
    Subjects: Finance, Political Science, Economics, Business

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
    (pp. ix-xiv)
    (pp. xv-xviii)
  5. CHAPTER 1 The End of a Mirage More Money Increases Inflation but Not Employment
    (pp. 1-32)

    This first chapter describes the learning trajectory that led economists and policymakers to regard controlling inflation as a priority and to pursue this goal of greater price stability more effectively. Starting from the final third of the twentieth century, the discipline of macroeconomics generated advances in the understanding of inflation that went on to have a powerful impact on the design of effective monetary policies to counter inflation.¹ At the heart of these advances was the concept of the neutrality of money over the long run as established by the classical school of economics: changes in the money supply affect...

  6. CHAPTER 2 Origins of Inflation Monetary, Fiscal, and Financial Links
    (pp. 33-53)

    The previous chapter reviewed the journey that, starting in the aftermath of the First World War and ending with the Great Inflation of the 1970s, led many central bankers—supported by government policymakers—to view price stability as their main goal rather than as merely one side of a trade-off between inflation and unemployment. The control of money creation—the source of inflation—is the sine qua non for stabilizing inflation. This is the traditional view endorsed by John Maynard Keynes in 1923 and developed in particular by Phillip Cagan in 1956 in his study of hyperinflations. Milton Friedman (1968:...

  7. CHAPTER 3 Ending Inflation Without Prolonged Recession Introducing Credibility
    (pp. 54-92)

    A promise is a promise—in other words, a contract, whose benefits in terms of credibility policymakers seem to have understood by committing fully in the conduct of monetary policy to the primary objective of low inflation. Various means have been developed to enhance the credibility of this promise, such as developing rules and communicating as transparently as possible with the public. Monetary policy credibility has also been built on the strength of track records of inflation control and of adhering to anti-inflation commitments.

    Following the Great Inflation in the late 1960s and 1970s in mature economies and high inflation...

  8. CHAPTER 4 The Coordination of Monetary and Fiscal Policy
    (pp. 93-124)

    So far in considering the components of effective monetary policies to control inflation we have highlighted the decisive role that is played by credibility and seen how credibility can be established and enhanced through rules-based policy frameworks and independent agencies to implement such regimes. This chapter examines how the same test of credibility, hence supportive public expectations, must also be passed by fiscal policy. For if this fiscal test is failed, even the best designed monetary policy efforts will be unavailing. This chapter also shows how transparent rule-based inflation targets can facilitate resolution of the most intractable fiscal problems.


  9. CHAPTER 5 Who Is Voting for Low Inflation and Why?
    (pp. 125-153)

    We saw in previous chapters that to control persistent high inflation it is necessary to carry out a sweeping and lasting regime change (Sargent, 1993). Reducing deficits and controlling the money supply, when carried out radically and quickly, can be immediately beneficial politically as well as economically (Shleifer and Treisman, 2000). Often however governments have carried out “cosmetic” reforms that succeed in reducing inflation while failing to address the root cause—namely, the fiscal deficit. This results in nothing better than a temporary inflation reduction followed by relapse (Sargent, Williams, and Zha, 2009), leading Bruno (1993: 263) to ask,


  10. CHAPTER 6 Monetary and Financial Stability Conflict or Complementarity
    (pp. 154-185)

    Jackson Hole is a place in Wyoming where the Federal Reserve hosts an annual retreat at which central bankers, economists, and various observers discuss topical issues facing monetary and broader economic policy makers. The Jackson Hole gathering in 2005 was the last to be held during the long Fed chairmanship of Alan Greenspan. Joining the chorus of praise for Greenspan on that occasion, the governor of the Bank of England, Mervyn King (2005a:5), said that one of the main lessons to be drawn from Greenspan’s tenure at the Fed was that “economics is not a set of doctrines but a...

  11. CHAPTER 7 Inflation in an Open World Does That Change the Rules?
    (pp. 186-213)

    Paul Krugman wrote in 1999, “We live in the Age of Central Banker. . . . Through much of the world, quasi independent central banks are now entrusted with the job of steering economies between the rocks of inflation and the whirlpool of deflation. Their judgment is often questioned, but their power is not.”

    The responsibilities and expectations which thus bear down on central bankers must have weighed particularly heavily on Mervyn King, the governor of the Bank of England when, one evening in June 2008, he carried out his legal obligation to send a public letter to the chancellor...

  12. CONCLUSION Adapting to Expectations
    (pp. 214-222)

    The preceding chapters have covered a wide variety of topics, perspectives, and debates surrounding inflation. It will be clear from this mosaic that I hold to a holistic understanding of monetary economics—in the sense that I see the phenomenon of inflation as arising out of a confluence of economic policies. Inflation is not the sole result of expansionary monetary policy, so cannot be controlled solely by running a tight monetary policy. The role of fiscal policy is central. Most important of all is the authorities’ credibility, as this is the key to anchoring the public’s expectations about the price...

  13. References
    (pp. 223-254)
  14. Index
    (pp. 255-272)