One is that holding money becomes more expensive, because its purchasing power decreases with inflation."
one might suggest this money tax is a fine way to get agent/players on board the electronic payment and depository grid
indexing money accounts sweeps away the tax on money
as a way to store and preserve " purchasing power "
in a pure credit economy maintaining real balances is intrinsically costless
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"It has been
known for some time that inflation goes hand in hand with greater variability in
relative prices."
on the face of it this appears signifigant only to those made sensitive
to substitution and income effects
" To the extent that inflation causes this relative price
variability, it is costly, because relative price changes caused by inflation
alone distort the market mechanism. "
yes if prices have variable adjustment rates and a higher general inflation increases these "absolute " distortions ....
"many prices are changed infrequently at different times. If the price of
good X is changed each April, and the price of good Y is changed each October,
then inflation will cause good Y to be too cheap relative to good X in the
summer and too expensive in the winter. "
amazing ...no ?
talk about a behaviour based model that has no plausible real world equivalent
"There is no reason in terms of supply or
demand for this pattern in the relative price of X in terms of Y, so if it leads
to changes in consumption or production it misallocates resources. The higher
the rate of inflation, the greater this misallocation cost."
I" Keynesians certainly believe that slow or
'sticky' price adjustment is pervasive, and is largely responsible for
generating persistence in business cycles."
" The reasons why many prices are
sticky appear diverse and complex, but imperfectly competitive markets do seem
to be important"
. "..quantify
the costs of the relative price movements generated by inflation and sticky
prices"
" calculations suggest that changes in inflation generate
significant changes in social welfare through this route. "
"This means that the
type and source of inflation is important. If inflation occurs in commodities
where prices are changed frequently, then it is much less costly than if
inflation occurs in prices that are sticky. In other words, some types of
inflation are more costly than others."
target "'core' inflation...."?
.[2] (If there are trends in relative
prices, then this idea also influences the optimal inflation target: see
Alexander Wolman here,
for example.) The same type of argument also suggests that central banks should
be concerned with wage inflation as well as price inflation.[3] This is because wages are themselves
'sticky', and so wage inflation will generate costs by changing relative wages
in a distortionary manner just as price inflation causes distortionary relative
price changes. All this is explained clearly, in considerable technical detail,
by Michael Woodford here.
To see why
this is important, consider the recent impact of higher oil prices. This has a
direct and fairly immediate impact on inflation. A hard-line inflation targeter
would say that an inflation target is an inflation target, so the monetary
authority should try and make non-oil price inflation fall to offset the impact
of higher oil prices. However oil prices, and some things they influence like
petrol prices, are pretty flexible. If inflation is costly because it induces
unnecessary relative price distortions in prices that are sticky, then it makes
sense to focus on inflation measures that give much less weight to oil prices
than the consumer price index. In other words, core inflation is not just useful
because it helps predict longer term trends in actual inflation, it is important
because it actually matters more than actual inflation."
