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The Costs of Inflation Revisited

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  • Horwitz, Steven
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    Abstract

    Neoclassical treatments of inflation understate the costs associated with inflation, even at very low levels. A comparative institutions perspective that recognizes the epistemological properties of prices and the institutional process by which inflation takes place, reveals the costs of inflation to be both larger and more widespread than standard treatments suggest. This paper makes use of insights from Austrian economics, public choice theory, and the new institutional economics to argue that inflation imposes costs by undermining the coordinative properties of the price system. Not only are there the direct costs of increased economic error, but actors also divert resources away from direct want-satisfaction into attempts to either prevent or cope with the increased degree of uncertainty inflation imposes. These resource costs are best understood from a comparative institutions perspective, as traditional measures of economic well-being, such as GDP, cannot distinguish between exchanges that directly satisfy wants, and exchanges that are attempts to correct or prevent utility-diminishing activities. The analogy between these coping costs and rent-seeking behavior is explored. In addition, inflation imposes costs by undermining the coordinative properties of markets and inducing actors to, on the margin, prefer to seek wealth or allocate resources through the political process. Copyright 2003 by Kluwer Academic Publishers

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    Bibliographic Info

    Article provided by Springer in its journal Review of Austrian Economics.

    Volume (Year): 16 (2003)
    Issue (Month): 1 (March)
    Pages: 77-95

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    Handle: RePEc:kap:revaec:v:16:y:2003:i:1:p:77-95

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    Web page: http://www.springerlink.com/link.asp?id=100335

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Sumner, Murphy, Richman, and Cantillon Effects
      by Steve Horwitz in Coordination Problem on 2012-12-06 19:09:43
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    Cited by:
    1. Selgin, George & Lastrapes, William D. & White, Lawrence H., 2012. "Has the Fed been a failure?," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 569-596.
    2. Mina Baliamoune-Lutz & Pierre Garello, 2011. "Tax Structure And Entrepreneurship," Post-Print halshs-00706942, HAL.
    3. Anthony Evans & Robert Thorpe, 2013. "The (quantity) theory of money and credit," The Review of Austrian Economics, Springer, vol. 26(4), pages 463-481, December.
    4. Davis, George K. & Hineline, David & Kanago, Bryce E., 2011. "Inflation and real sectoral output shares: Dynamic panel model evidence from seven OECD countries," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 607-619.
    5. Rather, Sartaj Rasool & Durai, S. Raja Sethu & Ramachandran, M., 2014. "Inflation and relative price variability: Evidence for India," Journal of Asian Economics, Elsevier, vol. 30(C), pages 32-41.

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