Inflation. Non-monetary aspect PDF
Preview Inflation. Non-monetary aspect
INFLATION NON-MONETARY ASPECT INFLATION NON-MONETARY ASPECT Dmitry G. Alexandrov Doctor of Economics, Professor Gubkin Russian State University of Oil and Gas ABSTRACT The textbook examines institutional and monetary causes of inflation in an economy. The macroeco- nomic approach makes it possible to view inflation as an inevitable institutional phenomenon related to continued cyclicity of modern economy. The paper addresses the relationship of inflation versus in- come and the money supply level using coefficients and curves of elasticity. Distinctions of inflatio- nary conditions in different countries and shortcomings of economy «therapy» exclusively by mone- tary policy are also shown. Under review are the post-soviet Russian inflation process treated as an institutional phenomenon, its causes, stages and features. (cid:1)(cid:2) CONTENTS (cid:1) INTRODUCTION .................................................................................................................... 6 (cid:1) CHAPTER 1. Inflation: monetary and non-monetary approaches. Inflation as an insti- tutional phenomenon of modern society. Types and criteria of inflation and their classifica- tion .................................................................................................................................................... 8 (cid:1) CHAPTER 2. Macroeconomic approach to inflation. Monopolism of macroeconomic agents as a principal cause of inflationary process in a modern economy ................................. 21 (cid:1) CHAPTER 3. The relationship of inflation vs. income. Elasticity of inflation rate rela- tive to income level and its types .................................................................................................... 27 (cid:1) CHAPTER 4. The relationship between inflation rate and money supply level in an economy. The level of money supply and its concept. The inflation rate elasticity relative to the money supply level and its types .............................................................................................. 38 (cid:1) CHAPTER 5. The relationship of the money supply level to income. Elasticity of the money supply level relative to income level .................................................................................. 45 (cid:1) CHAPTER 6. The inflationary process in Russia: causes and features .............................. 57 (cid:1) CONCLUSION ......................................................................................................................... 63 (cid:2) (cid:1)(cid:2) A high rate of inflation is the key indicator of inefficiency, incompetence, insolvency of the national government and noncompetitiveness of the national economy! Ipse dixit (cid:1) INTRODUCTION Currently inflation has become a central problem for many countries, its con- trol being a chief goal of the macroeconomic policy in these countries. But there are countries with a rather low inflation level and even deflation in the economy (Table (cid:1)1). Consumer price indices in percentage [1] Table (cid:1)1* COUNTRY January, 2010 in % to January, 2009 HIGH INFLATION (3-10% and more) Ukraine 111,1 Turkey 108,2 The Russian Federation 108,0 Kazakhstan 107,3 Belarus 106.6 Hungary 106.2 Romania 105,2 Brazil 104,6 Poland 103.9 The United Kingdom (Great Britain) 103,5 Republic Korea 103.1 Luxembourg 103,0 MODERATE INFLATION (1 – 3%) Norway 102,7 Sweden 102,7 The USA 102,6 Cyprus 102.5 Greece 102,3 Denmark 101,9 Canada 101.9 Bulgaria 101.8 Slovenia 101,8 Finland 101,6 Italy 101,3 Austria 101.2 France 101.2 Malta 101,2 Spain 101.1 LOW INFLATION (0 – 1%) 100,8 Germany 100,8 The Netherlands 100,4 The Czech Republic 100,4 Portugal 100,1 (cid:4)(cid:2) DEFLATION Slovakia 99,8 Lithuania 99,7 Estonia 99,0 Japan 98,7 Ireland 97.6 Latvia 96.7 *Our classification of inflation rates differs from the traditional classification Reasons of inflation are often reported to be an unfairly high growth of population income, un- covered by goods and services and issue of money to which the state resorts to clear off its debts. Therefore, economists and politicians often appeal to freeze income of population, to cut expenses of the state, particularly those related to social service, namely, for education, science, medicine, etc. These unpopular measures batter population credibility to the state and flare up social and political tensions in the country. In practice, meanwhile, the relationship of inflation rate vs. actual income growth of population and money supply is not quite clear. The transmission or transfer mechanism of growth effects of income and money supply on a price level growth in the national economy is rather complex and acts with a certain delay or time lag. Moreover, in some countries a growth of income and additional issue of money would not always lead to an adequate increase in inflation rates. While in others, any growth in income, even a minor one, or uncovered issue of money could lead to hyperin- flation. To explore the relationship of inflation vs. income and money supply it is necessary to get to the back of inflation and its causes. (cid:5)(cid:2) (cid:1) CHAPTER 1. Inflation: monetary and non-monetary approaches. Inflation as an institutional phenomenon of modern society. Types and criteria of inflation and their classification For convenience, we can differentiate two basic existing concepts of the inflation nature: 1) monetary concept; 2) non-monetary theory of inflation. According to the first concept inflation is of a monetary nature while the second one suggests different – the sources of inflation can be non- monetary or not only monetary. According to the monetary concept inflation is a purely monetary phe- nomenon, and price movement depends exclusively on a money supply change, i.e. tight unequivocal conformity of price movement and growth rate of money supply is established. These concepts are based on the quantity theory of money. The critics of such approach state that a price level affects both the growth rate of money supply and a number of other factors, including inflationary expectations and changes in the levels of issue and unemployment. The theoretical bases of these concepts are: the Ar- thur Okun’s Law; Alban William Phillips's Curve; John Richard Hicks – Alvin Harvey Hansen Model (IS-LM) and etc. Economic literature differentiates various criteria and inflation types. The following inflation types can be distinguished depending on rates: • Low inflation – normally 1% rate per year. • Moderate inflation – annual 3–10% growth rate of general price level that is believed to be normal for modern economy. • Galloping inflation is also percent measured annually, but the rate measurement is two-digit thus posing a serious problem for developed countries. • High inflation is percent measured monthly and can reach 200–300% per year of inflation during the year (to calculate inflation during the year we use the compound interest formula). It is found in many developing transition economies. • Hyperinflation is percent measured weekly and even daily, reaching 40–50% per month or over 1000 % per year. The above shows the growth rate of the general price level as criteria to distinguish the above listed inflations. Economic literature distinguishes obvious, hidden or suppressed inflations. In this case the cri- terion to distinguish the inflations is the manner of manifestation. It alters cases – obvious, open cha- racter in one case and latent, suppressed character in the other one. Thus, the literature states no difference between hidden and suppressed inflation. Therefore clarity is necessary to be introduced: 1) Explicit inflation – a long-term trend of a general price level increase in an economy of ob- vious open character; 2) Hidden inflation – issue of money uncovered by goods and services implemented by the state with the aim to cover the budget gap resulting in a general price level growth; short-term and long-term borrowings from the population or households in the form of shares, bonds and other secur- ities attributing to money; 3) Suppressed inflation– price governmental control aimed at their stabilization or decrease leading to the shortage of goods and services. So, the inflation formula is as follows: (cid:2) (cid:2) (cid:2) (cid:2) total = explicit + hidden + suppressed According to the source of origin there are the following types of inflation: Commodity inflation – suppressed inflation in the form of shortages of goods and services; (cid:6)(cid:2) Monetary inflation – hidden inflation, which is unsecured with goods and services, monetary emission, which is then bound to cause the growth of the general price level; Price inflation – explicit inflation in the form of direct price increases occurring because of the excessive demand for these or other types of goods and/or services; Let’s analyze a graphic presentation of the above given inflation types. Schedule (cid:1)1 An explicit inflation P (cid:4) (cid:5) =(cid:5) (t) P 2 (cid:16) (cid:3)P (cid:1) A (cid:15) P 1 (cid:3)t (cid:1) 0 t t t 1 2 = (cid:5)(cid:6)(cid:7)(cid:5)(cid:8) (cid:13)(cid:5) (cid:5)(cid:6) (cid:1) (cid:2)(cid:3)(cid:4) (cid:9)(cid:10)(cid:8)(cid:11)(cid:11)(cid:12) (cid:4) (cid:9)(cid:10)(cid:8)(cid:11)(cid:11)(cid:12) (cid:2)(cid:3)(cid:4) (cid:14)(cid:8)(cid:9)(cid:10)(cid:8)(cid:11)(cid:11)(cid:12) (cid:5)(cid:8) (cid:5)(cid:8) (cid:5)(cid:8) Hidden and suppressed inflation: distinctions and options of presentation Hidden inflation is the money issue that will cause a general price level growth in future. Sup- pressed inflation is the money issue that will cause an income growth of macroeconomic agents, ag- gregate demand and, finally, deficit of goods and services in an economy. Therefore, the distinctions between hidden and suppressed inflations come only to possible or impossible actions of macroeco- nomic agents to raise prices for goods and services currently or in future. Provided the issue of money is followed by an instant and self-raise of prices for goods and services, there is no time lag in this case. If prices increase after a certain period of time following the issue of money it indicates the pres- ence of a time lag. Hidden inflation causes a price increase. Suppressed inflation leads to the shortage of goods and services. (cid:7)(cid:2) Deficit and its graphic presentation Schedule (cid:1)2 DEFICIT, TRADITIONAL GRAPHIC PRESENTATION AT MICROLEVEL (cid:4)(cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Surplus (cid:2)(cid:1) (cid:1) (cid:7)(cid:1) (cid:4) (cid:1) (cid:5)(cid:1) (cid:1) (cid:1) (cid:1) (cid:3)(cid:4)(cid:2) (cid:1) (cid:1) (cid:1) Shortage (cid:9)(cid:1) (cid:4) (cid:1) (cid:6)(cid:1) (cid:8)(cid:1) (cid:1) (cid:1) (cid:9)(cid:1) (cid:1) (cid:1) (cid:1) (cid:3)(cid:1)(cid:10) (cid:3)(cid:10) (cid:5)(cid:1) (cid:6)(cid:1) (cid:1) (cid:10)(cid:1) (cid:1) (cid:11)(cid:1) (cid:10) (cid:10) (cid:10) (cid:10) (cid:5)(cid:12)(cid:1) (cid:6)(cid:1)(cid:1) (cid:5)(cid:1) (cid:6)(cid:12)(cid:1) (cid:1) In the point (A) – there is a surplus of goods and services Surplus = (cid:6)(cid:7) = Q – Q = (cid:3)Q (at price P ); 1 1e 1 1 In the points (C) and (D) – there can be a balance between demand (D) and supply (S) (at the price levels P and P ); 1 2 In the point B – there is a deficit of goods and services; Deficit = DB = Q – Q = (cid:3)Q (at price P ); 2e 2 2 2 CONCLUSION: A reduction in prices on goods and services (P P ) can lead to the deficit 1 2 ((cid:3)Q ) 2 (cid:8)(cid:9)(cid:2) Schedule (cid:1)3 (cid:1) DEFICIT, TRADITIONAL GRAPHIC PRESENTATION AT MICROLEVEL (cid:1) P (cid:2) S (cid:2) Surplus (cid:2) A B P 1 (cid:2) (cid:2) E P е (cid:2) ∆P (cid:2) Shortage D (cid:2) C P 2 (cid:2) (cid:2) D (cid:2) (cid:2) ∆Q (cid:2) Q 0 (cid:2) Q Q Q 1 е 2 (cid:2) In the point (E) there is a balance of demand (D) and supply (S). To this point there corresponds the equilibrium level of the price (Pe) and equilibrium level of the output (Qe); At the price level (P ) there is a surplus of the goods and services; 1 SURPLUS = AB = Q – Q = (cid:3)Q; 2 1 At the price level (P ) there is a shortage of goods and services; 2 DEFICIT = DC = Q – Q = (cid:3)Q; 2 1 (cid:8)(cid:8)(cid:2) The combination of supply inflation and demand inflation can be graphically presented as «def- icit scissors», and correlation of their «ends» at a micro-level by individual types of goods and services allows calculation of the market panic factor: MP = × 100%, where: (cid:13)(cid:17) MP – T(cid:13)h(cid:18)e market panic factor; (cid:3)D – Rush demand for goods and services/increase in demand for goods and services; (cid:3)S – Real market supply cut of goods and services. Schedule (cid:1)4 «DEFICIT SCISSORS» (cid:9)(cid:16)(cid:1)(cid:15)(cid:1) (cid:9)(cid:1) (cid:9) (cid:6)(cid:1) (cid:8)(cid:1) (cid:3)(cid:9)(cid:2) (cid:7)(cid:1) (cid:9) (cid:16)(cid:15) (cid:18)(cid:19)(cid:9)(cid:19)(cid:15)(cid:1) (cid:5) (cid:5)(cid:1) (cid:3)(cid:15)(cid:2) (cid:15) (cid:6)(cid:1) (cid:2)(cid:1) (cid:15)(cid:1) (cid:3)(cid:17) (cid:1) (cid:17)(cid:1) (cid:11)(cid:1) (cid:17) (cid:17)(cid:5)(cid:1) (cid:6)(cid:1) (cid:8)(cid:10)(cid:2)
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