Financial Inflation Research Articles

INFLATION AND GROWTH IN DEVELOPING ECONOMIES: A TRIBUTE TO PROFESSOR THIRLWALL

This paper pays tribute to Professor Thirlwall’s substantive work in growth and development economics by providing a review of his book Inflation, Saving and Growth in Developing Economies (1974b) [hereafter ISGD]. Indeed, the hallmark of a good economics book is whether its theoretical content and empirical predictions made several decades ago remain relevant when assessed against more recent evidence. Thirlwall’s ISGD book exhibits all these qualities. It emphasises the importance of distinguishing between different types of inflation. Structural inflation and, to a lesser extent, cost inflation, should be seen as the inevitable outcomes of the growth and development process, whereas demand inflation may act as a direct stimulus to growth, as predicted by the Kaldor-Thirlwall model of forced saving and the inflation tax model. These theoretical insights remain highly relevant in today’s developing economies. Studies tend to show that inflation thresholds, up until the point where the effect of inflation on growth is positive, tend to be higher in developing economies relative to advanced countries, owing to a combination of structural, cost and demand-side sources of inflation. The analysis further argues that inflationary finance of development, as advanced in ISGD, remains a viable development strategy when open-economy constraints are considered.

COMPUTATIONAL MODELING OF FINANCIAL SYSTEM VIA A NEW FRACTAL–FRACTIONAL MATHEMATICAL MODEL

The emergent global economy depends on financial growth. Social and economic development is achieved by a stable, growing, and secure financial chain system. Financial instability poses huge financial inflation and economic decline. The financial crisis and the turbulence of the finance market also result in deterministic instability. This fluctuation during the financial operation may also critically affect the development of the economic system and other sociological and financial stabilities. For the chaotic behavior of the finance system, the mathematical formulation is developed along with controlling terms in this paper. Fitting the controlling parameters, the financial model can be made secure and safe from periodic behavior and will run in chaotic conditions. At the first attempt, the dynamical system and the controlling parameters are adjusted through assigned values and their ranges. Second, the impact of these parameters is studied along with the feasible techniques by graphical representations. The said financial dynamics are investigated in the sense of fractal–fractional derivatives. The concept of Ulam–Hyers stability is also developed for the considered model.

The interdependence of Fiscal and Monetary Policies in an Emerging economy

This article's main goal is to evaluate the degree of fiscal dominance in Uruguay in 1999-2019 to improve the understanding of economic policy for theoretical reasons and applied needs related to good practices and accountability. Two strategies are followed: one, to quantify the fraction of fiscal expenditures that are financed by monetary liabilities and, the other one, to analyze the effects of fiscal deficit on the price level and inflation because inflationary financing may prevent the central bank from reaching its inflation target. Both situations may subordinate the monetary policy to the fiscal policy, signaling fiscal dominance. In addition, through the analysis performed to assess the degree of fiscal dominance, it is possible to detect the main determining factors of the Uruguayan price level (inflation) formation during the last two decades. So far, preliminary results suggest that inflation is not exclusively a monetary phenomenon and point to some inflationary financing with a mild degree of fiscal dominance.

The Impact of Inflation Prospects on Investments of Industrial Companies (Jordan’ case)

This paper aimed to evaluate the impact of inflation prospects on investments of Industrial Companies in Jordan. The main objective is to elaborate the most relevant and feasible techniques to improve the prospects for developing the invests in the industrial sector. In the introduction part, inflation prospects and selected methods of analysis via available information resources were defined. It is well known that inflation is a prominent economic phenomenon in the modern world. The financial inflation is the prime objective of present study because it is primarily concerned with the investment process, especially to consider that inflation almost affects both the foreign and domestic direct investments by almost equal rates. The topic of industrial development is highly concerned with process of investment in Jordan. This research deals with the inflation effect on investment outcomes of most industrial companies in Jordan. This study will contribute to enrich the existing literature with financial structure and investment decisions via monetary inflation represented by capital, commodity and imports within the set of industrial companies. The study tool is a questionnaire that collected the needed data aiming to elaborate the preset conclusions of this research. Pearson correlation testing program was implemented to measure the relation between inflation and investment procedures. Overall outcomes revealed that the lowest coefficient observed between imports inflation. and all other variables were reversed, most increases in imports inflation were almost stabilized by the decrease of the other variables. While all other correlation values were positive.

A 100 Years of Dollar Hegemony

The essence of monetary hegemony is the power of one monetary authority to influence monetary conditions outside its jurisdiction. Such power did not exist under the gold standard but came into existence for the U.S. Federal Reserve in the aftermath of the First World War. The basis of that power was the massive drain of gold out of Europe into the U.S. during its period of neutrality and the scope for the newly created Federal Reserve to pursue a discretionary monetary policy with specific aims such as stable prices, rapid recovery from recession, and countering pullbacks in the equity market. Throughout its 100-year exercise of monetary hegemony, the U.S. has used this in ways that have spread inflation around the globe, both goods inflation and asset inflation. Both the U.S. and the rest of the world would have benefited from a U.S. monetary hegemon based on sound money principle rather than on inflationary finance.

Assignats or Death: Inflationary Finance in Revolutionary France

Between 1794 and 1796, France experienced an unprecedented hyperinflation fueled by an explosion of paper money called the assignat. In September 1795, the French adopted the Constitution of Year III, which we use to demonstrate how changes in the rules of the game and in the political equilibrium can have important effects on the monetary phenomena that are critical to the study of inflationary finance. We find that the new regime had a structural effect on the demand for money that substantially weakened the link between real money balances and inflation, and that failing to account for this effect results in substantially different estimates of the seigniorage-maximizing rates of inflation. If we ignore this effect, we find that the seigniorage-maximizing rate of inflation was 35% per 10 days, but once we incorporate the effect of the new regime, this rate falls to 19%. Lastly, we also find that the new regime increased the volatility of inflation, suggesting that the previous regime was more effective at anchoring the public's inflation expectations. Taken together, these results lend credence to the constitutional perspective's primary theoretical insight.

The Impact of Monetary Inflation on Investment Decisions in Jordanian Industrial Companies

It's a paper that studying money inflation that is an associated with the investment process and is noted to almost affect both Foreign Direct Investment (FDI) and domestic direct investment (DDI)simultaneously. Industrial development issues are often related to investment process in Jordan. The study highlights how financial inflation affects decisions of investment of most industrial companies in Jordan. Through this study future studies will be conducted with the conceptual structure of investment decisions through monetary inflation as a shape of capital, commodities, and import inflation in Jordanian industrial companies. To acquire the important information that helped to justify the study hypothesis, a question. To confirm the direct investment decisions and inflation relationship, Pearson's Correlation Test formula was used in this analysis. The entire results found: the lowest coefficient was in the overall correlation coefficient for imported inflation and the reserved variables. It was noted that when other variables decrease, the rising in most imported inflation might be compensated. In other hand, the remaining variables' correlation coefficient had a positive value.

Pengembangan Ekonomi Syariah terhadap Potensi Pariwisata Besar oleh Bank Indonesia

Management of a large tourism industry based on sharia economy is one of the breakthroughs that attracts the attention of financial institutions to promote economic growth equally. Economic resources that must be supported by financial institutions to maintain economic equality are the trade, textile, electronics, agriculture and large tourism sectors. With that, without the support of Islamic financial institutions will not be implemented stable and equitable economic growth. The purpose of this research is to support the distribution of Islamic economics to the industrial sector which can create economic growth and maintain the stability of public financial inflation. The research method used by the author uses qualitative methods or literature research studies with the Indonesian Banking system approach to solving Islamic financial problems. The results of this study indicate that the development of the sharia economy to the industry's large tourism potential can be a development in opening access to economic growth and can create an increase in sharia-based economy and can maintain national financial inflation.

Forecasting Inflation Rate: Professional Against Academic, Which One is More Accurate

This paper evaluates the professional forecasts, those made by financial and non-financial forecasters and the aggregate between them, by comparing their results to academic forecasts. The US quarterly inflation rate and the professional forecasts are considered for the period of 1981 third quarter to 2012 final quarter. This paper examines whether academic forecasts outperforms the professional forecasts. For short term inflation forecasting the professional forecasters (non-financial, financial and the aggregate) proved to be the most accurate, however for long term inflation forecasting academic forecasts showed to be most accurate. The results also indicate that the long term aggregate forecasts related to information from the aggregate short term forecasts and current inflation rate. Furthermore, financial forecasters use the short term non-financial forecasts in their expectations and the non-financial forecasters use the short term financial forecasts in their long term expectations. In addition, the results confirm causality between the short and long term forecasts of the non-financial forecasters. For the financial inflation forecasts, there is no causality between the short and long term financial forecasts.

THE ISSUE OF ECONOMIC CRISES AND CYCLICAL FLUCTUATIONS IN POLISH ECONOMIC THOUGHT IN THE INTERWAR PERIOD

This paper presents the considerations of Polish economists about the economic crises and the business cycle in the interwar period. According to E. Taylor, the causes of the then crisis of overproduction, accompanied by the phenomenon of price scissors, included varied elasticity of demand for agricultural products and industrial products, as well as monetary inflation and new technical inventions. E. Lipinski believed that the crisis was a result of overinvestment. State interventionism in the economies did not ease, but aggravated the crisis on a global scale. W.M. Zawadzki pointed to the nature of the crisis in Poland as being due to economic underdevelopment, low consumption, and a huge shortage of capital. J.W. Libicki took the view that an analysis of the crisis in agriculture should be combined with an analysis of profitability of agricultural production. A. Krzyzanowski linked production fluctuations with changes in investment demand, and the latter with the assessment of profitability, which depends on the interest rate. A. Heydel explained the business cycle with an incorrect interest rate policy. At the same time, he postulated that the state should refrain from interference in economic life. On the other hand, M. Kalecki pointed to the excessive optimism of businesses, causing an increase in investment, which leads to changes in global demand, as a cause of fluctuations. He advocated the inflationary financing of public works by the state.

The Politics of Financial Development: A Review of Calomiris and Haber's Fragile by Design

Fragile by Design by Charles W. Calomiris and Stephen H. Haber introduces a framework for understanding financial crises and credit abundance with politics at its center. Using the historical experiences of five nations to illustrate, the authors propose that democracies such as the United States and Canada can have stable banks and ample credit so long as populist forces do not dominate the policy agenda, and that strong autocratic states such as Mexico can also achieve stability at the cost of restricting credit. Weak autocracies, such as Brazil over much of its history, often require inflationary finance and suffer from the banking fragility that comes with it. The authors identify populist ideologies and related policy decisions (such as unit banking, deposit insurance, and the Community Reinvestment Act) as underlying causes of banking instability in the United States as typified by the recent subprime crisis. Canada, in contrast, by holding populist forces in check through calculated political choices, remains crisis-free. (JEL D72, E44, G01, G21, N20, O16, O17)

Unconventional Monetary Policy, Income Distribution and Financial Inflation

Monetary policy have a decisive bearing on the concentration of income and wealth, but the policy makers prefer to avoid the subject and even today, there are few studies that address it. This document aims to establish the mechanisms through which monetary policy affects the concentration of income and wealth; transmission channels are established and existing errors in understanding inflation and income distribution are highlighted. It also states that the effects of monetary policy are not homogeneous, since they depend on the type of policy applied: conventional or unconventional, and shows, that the same policy, can have different effects depending on the composition of the balance of economic agents, their access to financial services, the type of assets held and specificity of the function of wealth. Finally, it states that the effects vary between developed and developing economies, and even within the same country.

STATE INTERVENTION AND MACROECONOMIC MANAGEMENT

The monetarists are opponents of government intervention and supporters of free market processes. Keynesians are, conversely, supporters and advocates of government intervention and opponents of uncontrolled operation of the market mechanism. As opponents of government intervention, the monetarists do not agree that it should take countercyclical fiscal policy which can cause greater increase in expenditures of the public sector during the recession, but spending cuts in the period of expansion and that, consequently, the public expenditures continue to increase. However, Tobin, indicating a negative attitude, claims that inflation cannot be used as a reason to reduce the budget, if fiscal policy has little or no effect on income. Undesirability of countercyclical fiscal policy is a logical consequence of the monetarist views on the stability of the sector and better performance of the free market of government intervention in social reproduction. Rule on a constant rate of monetary expansion eliminates the need for conducting discretionary policy, as the Phillips curve, previously defined, does not allow an optimal combination of inflation and unemployment. Therefore, the use of money (and interest rates and bank loans), as the goal of monetary policy provides economic policy makers to focus on managing variability (i.e. concentrate to money supply), which is beyond the scope of operation of the market, on the one hand, and to let determining the interest rates of bank loans and the free market, on the other hand. Finally, monetarists are extremely concerned about the multiple connections between inflation and expansion of the public sector, for three reasons: first, inflation increases the share of the public sector (and exacts an increase in public expenditure), if a progressive tax system is functioning; second, combating inflation can only indirectly limit the expenditure of the public sector, as the government expenditures partly increase by inflationary financing; and third, financing the budget deficit with the primary issues typically involves inflationary effect, which, if it continues, initiates the process prices and wages control. The paper is based on theoretical analysis of the impact of state intervention in the sphere of stimulating economic recovery, growth and development.

The behavior of money demand in the Chinese hyperinflation

In this paper I study the behavior of money demand during the episode of hyperinflation that occurred in China after World War II. I consider two popular and competing money demand specifications – the log–log and the semi-log – and show that the log–log performs better than the semi-log in its ability to track the behavior of the money demand. The choice between the two specifications is of great importance, as it implies that welfare cost estimates are very different for hyperinflation. The findings also contribute to the understanding of Cagan’s paradox and the failure of Cagan inflationary finance models. The paradox might be attributable to the popular semi-log schedule for money demand, and the log–log schedule might be an appropriate form for the analysis of hyperinflation.

Democracy and Macroeconomic Policy

A growing literature concludes that modern democracies have not adopted policies that benefit the majority to the extent predicted by social conflict theory. The most prominent reason is that globalization ties the hands of policymakers, making it hard for them to redistribute. Yet while progressive taxation has declined, we find that redistributive spending is higher in many democracies than would be expected by today's high levels of capital mobility. We also find that democratic countries that tend to appeal to the majority of the population, which we proxy for with the adoption of their own constitution after transition, use redistributive macroeconomic policies as an endrun around fiscal constraints. While popular democracies adopt flexible exchange rates that give them monetary autonomy, exhibit higher levels of inflationary finance, and incur more foreign debt, elite-biased democracies are more restrained. The latter also have smaller governments and engage in lower levels of redistributive spending.

A note on the Pazos-Simonsen mechanism and Kaldor's early research on Latin American inflation

In contrast with the inflationary finance story, inflation acceleration in Latin America has been explained as the result of the interaction of inflation dynamics and the frequency of wage adjustments. Accordingly, small inflation disturbances are connected with a shift from moderate to high inflation (or beyond to hyperinflation) though a mechanism that makes adjustment intervals in wage contracts endogenous. Rudiger Dornbusch (1986) labeled this process the Pazos-Simonsen mechanism. In this note we summarize the basic contribution of both Felipe Pazos (1978) and Mario Henrique Simonsen (1983) and find crucial differences between their views on wage dynamics, specifically regarding the endogeneity of the time interval between wage readjustments. A remarkable affinity with Pazos's view on wage dynamics and inflation is found in an early and almost unknown essay written by Nicholas Kaldor in 1957 (inspired in his brief experience in Latin America).

A Theory of Inflation, Tax Evasion and the Demand for Redistribution

We provide a theory which predicts that economies with greater inequality will tend to have greater tendency for tax evasion and more reliance on inflationary finance. Consistent with empirical evidence, the model features economies of scale in the credit transaction technology, and pervasive tax evasion in the extreme tails of the income distribution due to increasing returns in the tax evasion technology, and the existence of positive audit costs which makes auditing the poor unappealing. A rise in inequality in the sense of second order stochastic dominance spreads more mass to the tails, and raises the marginal cost of taxation thus making inflation more attractive from the public finance point of view. An important contribution of the paper is that when the level of redistribution is decided by majority voting, the median voter may prefer less redistribution, the greater the level of inequality, contrary to standard politico- economic theories, and consistent with some empirical evidence. We provide further empirical evidence in support of this view, according to which controlling for inflation and the size of the shadow economy dramatically changes the effect of inequality on redistribution.

Modelling the Transaction Role of Money and the Essentiality of Money in an Explosive Hyperinflation Context

This paper shows firstly that the cash-in-advance model presents exactly the same kind of limitations as the money-in-the-utility-function model for characterizing explosive hyperinflation. These limitations relate to sufficient money essentiality in the sense of Scheinkman [1980]. Thereby this paper departs from Gutierrez and Vazquez [2004] and contributes to the understanding of failure of the Cagan inflationary finance models with perfect foresight. Secondly, it shows that the inclusion of the goods market equilibrium condition calls into question the validity of explosive hyperinflationary paths as equilibrium paths in the cash-in-advance model. Two solutions are proposed to save the validity of explosive hyperinflation paths.

Financial development, institutional quality and maximizing-growth trade-off in government finance

This paper studies monetary and fiscal policies in an endogenous growth model with transaction costs. We show that the relation between long-run economic growth and both monetary and fiscal policies is subject to threshold effects, a result that gives account of a number of recent empirical findings. Furthermore, the model shows that, to finance public expenditures, growth-maximizing governments must choose relatively high seigniorage (respectively income taxation), if “institutional quality” and “financial development” indicators are low (respectively high). Thus, our model may explain why some governments resort to seigniorage and inflationary finance, and others rather resort to high tax rates, as a result of growthmaximizing strategies in different structural environments (notably concerning institutional and financial development contexts). In addition, the model allows examining how the optimal mix of government finance changes in response to different public debt contexts. A short empirical section confirms our theoretical results.

The Economics and Culture of Financial Inflation

In this paper ‘financialisation’ is broadly defined as a process of inflating capital markets or more strictly financial inflation. The paper examines some of the social, economic and political consequences of financial inflation for the activities of companies and the operations in debt markets of an increasingly financial middle class. Financial inflation alters the behaviour of individuals and firms, and hence the character and dynamics of the capitalist economy and society. The first section of the paper explains the Kalecki–Steindl theory of enforced company indebtedness in a middle-class society. The second section shows how financial inflation makes companies over-capitalised, resulting in a decline in the trend of long-term investment. The third section shows how forced company indebtedness is modified as the middle classes extend their consumption financed through inflating asset markets. A conclusion sketches out some of the consequences of this financialisation for politics, social policy, and moral and cultural attitudes.