David Laidler

Inflation: A Survey

Inflation is a process of continuously rising prices, or equivalently, of a continuously falling value of money. Its importance stems from the pervasive role played by money in a modern economy. A continuously falling value of pins, or of refrigerators, or of potatoes would not be regarded as a major social problem, important though it might be for the people directly engaged in the production and sale of those goods. The case of money is different precisely because the role that it plays in co-ordinating economic activity ensures that changes in its value over time impinge upon the well-being of everyone.

Hawtrey, Harvard, and the Origins of the Chicago Tradition

Milton Friedman has claimed that his monetary economics derives from a Chicago Tradition that, in the 1930s, offered a monetary explanation of cyclical fluctuations in general and the Great Depression in particular, an optimistic view of the power of monetary policy, and a case for governing it by rules rather than discretion. It is argued that all the elements of this tradition except the last are to be found in earlier writings of Ralph Hawtrey, Allyn Young, and Lauchlin Currie and that there is much evidence to point to a direct influence running from Hawtrey, through Harvard to Chicago.

The Rate of Interest and the Demand for Money--Some Empirical Evidence

r Z SEE relationship between the demand for money and the rate of I interest is a key one in macroeconomic models, and recently a fair amount of effort has been expended on investigating it empirically. However, this effort has not, on the whole, been directed solely at problems arising from the rate of interest but has generally been part of a larger attempt to investigate the nature of the demand function for money as a whole. As a result, the evidence that we have about the role of the rate of interest in this function tends to be fragmentary and hard to assess. There are at least

Some Evidence on the Demand for Money

I ALTHOUGH the demand function for money balances has been subject to a great deal of empirical investigation in the last few years, much remains to be done on establishing its exact nature. In this paper, I present the results of some recent work on this matter. As is usually the case, it is much easier to describe the statistical results of the study than to give them any firm economic interpretation. They are as follows. Permanent income is a better explanatory variable for the demand for money, no matter whether money is defined to include or exclude time deposits, than is either measured income or nonhuman wealth. Time deposits alone, however, are best explained by non-human wealth. Despite this latter fact, the stability of the demand function for money is improved by including time deposits in the definition of money. These results seem to throw light on three crucial issues in monetary theory. They suggest that inasmuch as wealth

Inflation Targets Versus International Monetary Integration: A Canadian Perspective

The debate about whether Canada should seek some form of monetary integration with the United States is surveyed. It is argued that the choice here is among overall monetary orders, rather than among exchange rate regimes considered in isolation, with particular attention needing to be paid to questions of the credibility of policy and the accountability of policy makers. Canadas recent economic performance under its current monetary order -- inflation targets, underpinned by a flexible exchange rate, and pursued by accountable policy makers -- is assessed, and arguments that the flexible exchange rate has undermined the economys real performance are analysed. Alternative orders are considered. It is concluded that the most economically attractive among them -- negotiated adoption by Canada of the US dollar with provision being made for meaningful Canadian input into policy decisions and the supervision and oversight of the monetary system -- is not politically attainable, and that the economic and political drawbacks associated with intermediate arrangements are large enough to render them clearly inferior to Canadas current monetary order.

The Price Level, Relative Prices and Economic Stability: Aspects of the Interwar Debate

Recent financial instability has called into question the sufficiency of low inflation as a goal for monetary policy. This paper discusses inter-war literature bearing on this question. It begins with theories of the cycle based on the quantity theory, and their policy prescription of price stability supported by lender of last resort activities in the event of crises, arguing that their neglect of fluctuations in investment was a weakness. Other approaches are then taken up, particularly Austrian theory which stressed the banking systems capacity to generate relative price distortions and forced saving. This theory was discredited by its association with nihilistic policy prescriptions during the Great Depression. Nevertheless, its core insights were worthwhile, and also played an important part in Robertsons more eclectic account of the cycle. The latter, however, yielded activist policy prescriptions of a sort that were discredited in the post-war period. Whether these now need re-examination, or whether a low inflation regime, in which the authorities stand ready to resort to vigorous monetary expansion in the aftermath of asset market problems, is adequate to maintain economic stability is still an open question.

An Empirical Macro Model of an Open Economy under Fixed Exchange Rates: The United Kingdom 1954-1970

At present, the student of the macroeconomics of inflation in open economies is confronted with a proliferation of competing, and often mutually inconsistent, models. It is our contention that empirical work is badly needed to bring some discipline to this area. In this paper, therefore, we construct a small-scale model that determines the behaviour of real income, prices, the balance of payments and the money supply in a fixed exchange rate open economy. We then subject the model as a whole to empirical testing against data drawn for the United Kingdom, and draw conclusions from that testing about which aspects of the model do appear to be consistent with the evidence and which do not. Thus we seek to make a threefold contribution. First, we present (yet another) small analytic model; second, we generate evidence about its empirical content; finally, and perhaps most important, we provide an example of how empirical work may be used to discipline and guide the process of model building even at a high degree of aggregation and abstraction.

Hicks and the classics: A review essay☆

I There is an old-fashioned resonance to this book’s title. A Market Theory of Money sounds a little like Money and the Mechanism of Exchange, and not entirely by accident. When Jevons (1875) and his Classical contemporaries enumerated the functions of money, they emphasized its role as means of exchange and unit of account. In this, his last book (henceforth MTM), Sir John Hicks treats money as an integral part of the institutional framework within which goods and services are traded, and as something that cannot properly be understood independently of a careful study of that framework. Quite self-consciously, then, he places himself in a tradition of monetary analysis that seemed to have died out in the 1930s. There is considerable irony here, because Hicks himself surely stands second only to Keynes in his influence on the monetary economics of that decade. His (1935) ‘Suggestion for Simplifying the Theory of Money’ antedates the General Theory (19361, though not the Treatise (19301, as a landmark in the evolution of the theory of liquidity preference. The particular IS-LM version of ‘Keynesian Economics’, which dominated the post-war textbooks and which provided the analytic framework for much of the Monetarist controversy too, was not Hicks’s creation alone, but its most influential exposition was his (1937) ‘Mr. Keynes and the Classics’. Whatever Hicks may have intended, these two papers helped to set monetary economics moving in what he later came to regard as the wrong direction. The book under review here is the third in a sequence which began with the Critical Essays in Monetary Theory (1967) and continued with The Crisis irz Keynesian Economics (1974). Like those it deals with ideas not just outside, but also critical of, the contemporary mainstream which their author had helped to start flowing. Also like those, it will probably be received respect-

Lucas, Keynes, and the Crisis

The article contrasts an intellectual history perspective on the transition from classical to neo-classical economics with doctrinal accounts of the marginal revolution. Marshalls opinions on the mixture of theoretical, methodological, and moral and political elements involved in the generational divide shows that more was at stake than accounts in which theory alone is stressed suggest. It is also argued that in other respects less was at stake: drawing a sharp dividing line between pre- and post-marginal treatments of policy issues does not do justice to underlying continuities in the empirical utilitarian tradition. The article is dedicated to the memory of R. D. C. (Bob) Black, whose work on Jevons illustrates the benefits of an intellectual historians approach to this significant transition in economic thinking.

Canada's Exchange Rate Options

anada has had a flexible exchange rate continuously in place for the better part of three decades. A great deal has changed in the interim, including our understanding of the economics of monetary policy; and a new debate about the relevant issues is surely welcome. The exchange rate regime, however, is but one element in a broader set of arrangements that we may call the monetary order, and policy toward it can only be discussed coherently in this broader context.