Inflation

Abstract

Abstract Inflation is a process in which the general level of prices in an economy rises, which means a decline of the value of money. Inflation may be explained by an incorrect monetary policy of the central bank (monetary theory of inflation), excessive aggregate demand compared to production capacities (Keynesian theory of inflation), and by an increase in production costs which is independent of the aggregate demand for goods (†∼ cost‐push’ theory of inflation). The negative effects of inflation largely prevail, and they are strongly amplified if the inflation is high and not anticipated. The costs of inflation include: (i) distortion of the informative function of prices; (ii) an inefficient management of money holdings (†∼ shoe‐leather costs’); (iii) additional effort to service economic processes (†∼ menu costs’); (iv) arbitrary redistributions of wealth; (v) uncertainty impeding long‐term decisions; and (vi) unfavourable changes in the balance of payments.