1. Macro stability - inflation Gene Chang

2. Inflation Another macro instability in a market system, in business cycles, is the price level Inflation deflation

3. Price stability Often measured by the inflation rate – –The percentage change in the price level Two indices – –Consumer price index (CPI) – –GDP price index (GDP deflator)

4. Consumer Price Index (CPI) CPI bureau of Labor Statistics surveys the average consumption basket of urban residents. Measuring the cost of living of a typical urban household

5. GDP Price Index GDP Deflator; or GDP Price Index Including the prices of ALL products that are included in GDP GDP Deflator and CPI use different baskets of the goods. CPI include only those items consumed by a typical urban household.

6. The inflation rate in the United States since 1870, CPI 6

7. The U.S. CPI Inflation Rate 2000 ---

8. Inflation history in the U.S. 1968-69 inflation. Reasons: tax cut, defense spending associated with the Viet Nam War 1972-74 inflation. Reasons: Poor harvest, oil shock and loose monetary policy during the Johnson period. Stagflation. Inflation in 1979, second oil shock 1980s. Price stabilization. Reagan administration. Monetary contraction and high interest rate. Economic recession in 1982. 1990s. Low inflation as productivity rose.

9. Dis- or De-flation Disinflation -- Inflation decelerates (The absolute price level increases, but at a diminishing rate) Deflation -- Price falls

10. International comparison CPI Inflation rates 2004 CountryInflation Rate Zimbabwe419.9 Iraq25.4 Russia11.5 China4.1 The U.S.2.4 U.K.1.4 Japan-0.1 Hong Kong-0.3

11. Inflation by countries 2007

12. Inflation by countries 2008

13. Cost of Inflation Purchasing power erosion Run-away Inflation or Hyperinflation – –The case in Germany in 1923 – –At an annul rate of > 100,000,000 – –breakdown of the market system Inflation cause uncertainty in the interest rate, thus, impeding investment and economic growth

14. Hyper inflation Above 50% Germany in 1923 Southern American countries, Brazil, Agentina

15. Hyper inflation for Latin American countriesin 1980s Hyperinflation Threatens Brazil by Lawrence W. Reed Origins of the Chinese Hyperinflation Hyperinflation in Germany Hyper inflation in Yugoslavia Hyper inflation in Israel

16. Hyper inflation for Latin American countries in 1980s Hyperinflation in Argentina, Bolivia. and Brazil. How would you like to live in an economy without memory, where you don’t know the price of anything day to day or the value of the wage you are paid? That’s what it’s like under hyperinflation, in Argentina, supermarket prices are increased twice daily. During the two weeks we were in Brazil in 1986, interest rates rose 100% from 330% to 430%. Bolivia’s demand for money is so great that its third largest import is currency.

17. Reasons for hyper inflation in Southern American countries Exploding government spending Ineffective tax system Strong unions, rigid labor laws and indexed wage system Price/wage spiral

18. Inflation in CPEs Under CPEs, prices were controlled Prices can be fixed for several years Widespread shortages in most commodities Black market prices Economics of shortage Repressed inflation

19. Inflation in transitional economies Price liberalization Shock therapy Poland Russia Lessons: instead of predicted one time price jump, those countries experienced chronic inflation for long time in the transition.

20. Reasons for chronic inflation in transition Structural inflation in the former CPE countries Asymmetric response in prices flexibility Asymmetric response in increasing output

21. Inflation in Poland Rates of Inflation, 1998-2004 (2000=100) Year Producers' Prices Consumers' Prices Wages 198314.3%13.3% 198418.8%11.8%17.7% 198515.8% 12.5% 198627.3% 20.0% 198757.1% 86.7% 1988220.5%247.7%283.9% 1989609.2%553.6%365.1% 199050.3%76.7%67.1% 199127.7%45.3%36.7% 199232.2%36.9%40.0% 199330.1%33.3%31.7% 199425.6%26.8%41.4% 199513.2%20.1%26.3% 1996NA15.9%20.0% 1997NA 19985.5%7.3%9.0% 19997.8%10.0%10.4% 20001.7%5.5%6.9% 20011.1%1.9%3.8% 20022.7%0.7%2.9% 20037.0%3.6%4.9%

22. Russia’s hyper inflation Annual Rates of Inflation (%/yr) in Russia, 1993-2004 Year Inflation in Producer Prices (%/yr) Inflation in Consumer Prices (%/yr) Inflation in the Wage Level (%/yr) 1993943.76874.62822.1 1994337.00307.38255.9 1995236.46197.41142.2 199651.2147.5764.8 199714.6714.6223.7 19987.03NA15.3 199958.9585.6554.7 200046.5320.7752.5 200119.1721.5043.3 200210.4315.7227.3 200316.3813.6626.1 200423.3510.8922.5