By Alex Cukierman
This e-book surveys the imperfect-information method of inflation and its actual results. kinds of informational dilemma are thought of. One consists of events within which members have uneven information regarding the present basic cost point and for that reason confuse relative and combination alterations in costs. the opposite considers events within which contributors can't distinguish everlasting from transitory adjustments once they ensue, making a transitority yet chronic confusion among such adjustments. the writer provides the arguments in the context of the new re-evaluations by means of economists of formerly verified perspectives touching on inflation and its interplay with actual phenomena.
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Extra resources for Inflation, Stagflation, Relative Prices, and Imperfect Information
If all prices double, neither consumption, production, nor labor supply deci sions should be affected. In particular, the rate of unemployment (a real variable) and the rate of inflation (the rate of change in a nominal vari able) should not be systematically related. Acceptance of this view raised the obvious question why empirically estimated Phillips curves displayed a systematic negative relationship between inflation and unemployment - at least until the end of the six ties. ] Friedman gave the fol lowing answer: When the rate of monetary growth accelerates and prices follow suit, employers realize that the price level is higher sooner than workers do.
However, says Friedman, this boost to employment can last only as long as workers do not realize the full extent of the change in the price 35 36 Aggregate-relative confusion level. As soon as they do, the effective labor supply shrinks and employ ment decreases back to its full information level (Friedman's "natural rate"). 1 Thus the Phillips curve exists only as long as workers are fooled about the price level: Once they realize what the price level is, the levels of employment, unemployment, and other real variables become inde pendent of the rate of monetary expansion .
Like Friedman's explanation, it implies that only unanticipated changes in the money supply or the general price level affect economic activity. Unlike Friedman's explanation, however, it is completely symmetric. All sectors of the economy are subject to the confusion between aggregate and relative movement in demands and prices. The crucial element here is that individuals obtain information on the price in their own market quicker than they do about the general price level . 3 This corresponds rather well to the actual state of affairs in Western countries; data on the general price level are usually published with a one- to two-month lag, whereas prices in individual markets can be observed daily by partici pants in those markets .