Abstract

Non-neutral Inflation

Inflation theory recognizes that in the equilibrium of a stationary economy the inflation rate and the money supply growth rate are equal. This relationship, however, does not constitute an inflation theory, for it does not exclude the case of the money supply growth rate, and hence the price-change rate, being zero or negative. The central problem of inflation theory consists in demonstrating why the money supply growth rate, and hence the inflation rate, is positive. In the “new classical macroeconomics”, inflation has no effect, i.e. it is neutral. Since therefore all price-change rates have identical real effects, the central problem of inflation theory remains unsolved. For the monetary authorities there is no reason to give a positive rate of change in the price level preference over a zero or negative rate. In contrast, in this essay models with non-neutral inflation (under rational expectations) are examined with respect to how far they give access to the central problem of inflation theory. If inflation has real effects, this may induce the monetary authorities to prefer certain price level change rates to others account of the implied real effects. It proves, however, that many macroeconomic models which offer substantiating arguments for the real effects of an inflation are nevertheless evidently unsuitable for solving the central problem of inflation theory. In some models the optimal inflation rate is zero, in others an optimum presupposes only stabilization of the inflation rate (at any level). However, one model is discussed, in which autonomous wage and price fixingisincluded, which exerts an effect on the aggregated wage and price level. In this model, the optimal price level change rate is positive.