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High Inflation.

By Daniel Heyman and Axel Leijonhufvud. New York: Oxford University Press, 1995. Pp. xii, 233. $39.95.

This book is based on the Arne Ryde Memorial Lectures the authors gave in 1989. It is a useful and thought provoking book, especially for an economist interested in high-inflation countries, such as Argentina, Israel and Turkey. The authors define high inflation as a situation where people measure inflation in percent per month rather than in percent per year, as is done in the advanced industrialized countries. They argue that because of high inflation, "In production and distribution, efficiency suffers. The financial structure is impaired and capital accumulation is reduced." In this, a small yet ambitious book, the authors confront mainstream economics, which one may consider as economics for the moderate-inflation industrialized countries, with the realities of high-inflation countries and in particular Argentine, and try to provide a better understanding of the workings of the economies of these countries. In view of their analysis, they furnish suggestions that may improve the economic performance of high-inflation countries.

The analysis starts with a discussion of inflation models found in the literature. While recognizing the complexity of the inflation phenomena, they do identify two theories of inflation--monetarist and structuralist. They find these inflation theories not very helpful in explaining the effects of inflation on the performance of the economy. This is followed with a discussion of the changes needed in inflation theory in accordance with the difficult to predict and volatile characteristics of high-inflation economies.

The authors identify the difficulty of financing the government sector as the main source of high inflation and provide an interesting account of high-inflation fiscal regimes. They indicate that, "If it [government] can neither make ends meet nor issue debt, monetary financing becomes the only remaining option." But, they do recognize that the fundamental source of difficulty in government finances is the inability of the political system in high-inflation countries to provide solutions to the struggle over distribution of income.

They proceed to discuss how people adapt to high inflation and an unstable and unpredictable environment, and how price instability hampers planning and wastes resources. Here, the authors provide several revealing and realistic explanations of the effects of high inflation. For example, they describe how durable goods and real estate markets are dollarized--domestic money is replaced with the U.S. dollar. The authors note that everyday transactions involving consumer goods are nevertheless carried out with domestic money and, "The result is that the economy operates in effect with two currencies (or perhaps more), with each one used in different types of transactions. Wages are paid in domestic currency, and the payments period generally does not change unless the inflation rate gets extremely high. Households adapt by building up inventories of consumer goods on paydays and the more well-to-do among them will quickly place the rest of their income into foreign currencies."

The authors provide a useful discussion of the stabilization of high-inflation economies. Although their discussion will not directly help economists designing a stabilization program who need to know the best way of estimating certain key parameters, such as income elasticity of demand for money or how to forecast net foreign assets or how to calculate equilibrium exchange rates, but their discussion is full of insights and should prove helpful in effective and efficient implementation of stabilization programs. One deficiency in their discussion of stabilization is their neglect of the account of the interaction of high-inflation countries with the International Monetary Fund, which usually plays an important role in stabilization of high inflation countries.

The final topic of the book is high inflation and contemporary monetary theory. The authors consider the role of money in monetary theory and reveal the fundamentally unimportant role money plays in this framework. They propose an alternative approach to contemporary monetary theory, and in this approach money is recognized as an institution in the economy that simplifies economic calculation, communication, and co-ordination. And, high inflation undermines these institutional functions of money.

The main thesis of the book is that high inflation retards economic growth. The explanation detailed in support of this view in this book is as rigorous as it can get--based on contemporary mainstream economics. In recent years the view that high inflation hampers economic growth appears to be gaining popularity among economists and policy makers; see, for example, a recent article by Bruno [1]. This book provides strong theoretical support for this view. Although this is not an easy book to read, those who patiently study it will find it rewarding. The book contains a mathematical appendix, a list of references, name and subject indexes.


[1.] Bruno, Michael, "Does Inflation Really Lower Growth?" Finance & Development, September 1995, 35-38.
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Author:Atesoglu, H. Sonmez
Publication:Southern Economic Journal
Article Type:Book Review
Date:Oct 1, 1996
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