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A framework for understanding inflation - with or without money

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  • Bengtsson, Ingemar

    ()
    (Department of Economics, Lund University)

Abstract

This paper presents a model that pictures how inflation is determined in a decentralized market process where prices are set in both simultaneous and sequential contracts. Price setting is seen as a coordination game between the price setters of sequential contracts. An important property of the model is that inflation thus can be explained without any reference to the quantity of money.Following up the finding that inflation is determined in a coordination game, it is subsequently claimed that whenever inflation does not follow a random path, people do seem to follow some rule of thumb when predicting future price levels. In the last section of the paper, it is finally claimed that this rule is best understood as a focal point, and furthermore that the central banks provides the focal point for inflation in the western world today. Central banks could thus be shown to be able to influence inflation rates, although the quantity of money plays no part in this process.

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Bibliographic Info

Paper provided by Lund University, Department of Economics in its series Working Papers with number 2005:28.

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Length: 19 pages
Date of creation: 16 May 2005
Date of revision:
Handle: RePEc:hhs:lunewp:2005_028

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Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en
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Related research

Keywords: Central Banking; Focal Points; Inflation; Monetary Policy; Money; Quantity Theory;

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  1. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
  2. Bengtsson, Ingemar, 2005. "Central bank power is a matter of faith," Working Papers 2005:21, Lund University, Department of Economics.
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