Ination

Irfan Ahmad Shah

NMIMS, Hyderabad

Irfan Ahmad Shah Ination

Ination

What is Ination
Persistent increase in general level of prices
Price indices (Weighted average of a number of individual products)
are used to measure the ination.
P − P 
The growth rate of indices t t−1
100 gives the rate of
Pt−1
ination in year t.

Irfan Ahmad Shah Ination

Three Strains of Ination

Low Ination - Single digit ination

Galloping Ination - Double digit ination (10 to 200 percent)
Hyperination - Million or trillion percent per year (Above 50
percent per month)
Anticipated vs Unanticipated Ination

Irfan Ahmad Shah Ination

Economic Impact of Ination

All wages and prices do not move at the same rate - Relative Prices
Ination aects poor the most
Ination can be benecial for borrower and harmful for lender if not
adjusted
Eect of ination on income and wealth distribution

Irfan Ahmad Shah Ination

Impact of Ination on Economic Eciency

Normally or at low ination, price change is due to actual change in

demand and supply
But at higher levels of ination, price changes may give confusing
signals.
Currency value is distorted due to zero interest rate
Money as a yardstick during ination?
Menu cost: reprinting catalogs, Remeter the cabs, Adjusting parking
meters/tickets, Price tags etc
Shoe-leather costs, valuable time

Irfan Ahmad Shah Ination

Macroeconomic Impacts of Ination

Ination and output has temporary positive relationship

Economic growth is strong in countries with low ination
Optimal rate of ination
Is zero ination optimal?

Irfan Ahmad Shah Ination

Ination Theories

Ination does not have a single source

Expected Ination vs Actual Ination
Core Ination vs Headline Ination
Demand-Pull Ination
Cost-Push Ination and stagation
Stagation - Stagnation with Ination or Ination with
Unemployment

Irfan Ahmad Shah Ination

Ination Theories

In Demand-Pull ination, the AD curve shifts to the right

In Cost-Push Ination, the AS curve shifts to the left (the supply
shocks)
Due to cost push ination, there is increase in prices with fall in
output - Policy challenge/dilemma

Irfan Ahmad Shah Ination

Policy Challenge

When AS shifts leftward, monetary policy can be used to shift the

aggregate demand but it can help in achieving only one target
Trade-o between ination and unemployment
Increase money supply, increase output and increase ination OR
Decrease money supply, decrease output and decrease ination
Phillips Curve

Irfan Ahmad Shah Ination

Phillips Curve

Phillips Curve in short-run and long-run

NAIRU - Lowest unemployment rate that can be sustained with
constant ination

Irfan Ahmad Shah Ination

Dilemmas of Anti-Ination Policy

NAIRU - when and where? How Long is long

Sacrice ratio - Cost of reducing ination

Irfan Ahmad Shah Ination