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iii) Inflation will set in motion a new round of pay increases, feeding further price increases and creating an inflationary spiral.

It is easy to understand that this scenario of high inflation would not be consistent with the goals of macroeconomic stability, sustained economic activity and low unemployment.

Q4 Compare the recent inflation experience of emerging market countries with that of the industrial countries. Which group has the higher inflation? Which has the higher economic growth? What inferences do you draw from this?

Industrial countries had very high inflation in the 1970s. This was due to oil price increases decided by OPEC countries in 1973 and 1979.  Inflation has gone down, more or less linearly, during the 1980s and the 1990s. Emerging countries depict a very heterogeneous pattern:

i) Latin America inflation was sky-high during all the 1980s, mainly due to the debt crisis of 1982 and economic policies out of control. In recent years, macroeconomic adjustment policies have reduced inflation in some countries (i.e., Argentina, which has chosen an exchange rate anchor policy against the U.S. dollar).

ii) Transition economies of Central and Eastern Europe have experienced high inflation after the collapse of the former Soviet bloc. Inflation is still high with respect to western standard in almost all those countries.

iii) Asian tigers have medium-low rates of inflation since the 1970s.  This inflation can be ascribed to the high growth rates and attendant structural changes in those economies.  Here growth is causing inflation, rather than the other way round.  Causal relations, as we point out in the chapter, between inflation and growth are less clear in this medium range than at the extremes of hyper inflation and very low inflation.


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