Published by EH.Net (February 2014)

Brigitte Granville, Remembering Inflation.  Princeton, NJ: Princeton University Press, 2013. xvi + 272 pp. $35 (cloth), ISBN: 978-0-691-14540-2.

Reviewed for EH.Net by John H. Wood, Department of Economics, Wake Forest University.

Remembering Inflation is principally “a survey of theoretical and applied work by macroeconomists starting in the last third of the twentieth century.  These researchers and thinkers are the heroes of this story.  They advanced the fundamental understanding of inflation by formulating sophisticated analysis and modeling that has cast the most penetrating light ever on its causes, costs, and cures.”  Brigitte Granville is referring to Robert Lucas, Thomas Sargent, and their co-workers, who demonstrated “that widely assumed trade-offs – in particular, between inflation and growth – can be illusory” (pp. ix, xii).

The book was inspired by the view recently expressed by Joseph Stiglitz in “Needed: A New Economic Paradigm,” Financial Times, August 19, 2010: “Bad models lead to bad policy; central banks, for instance, focused on the small economic inefficiencies arising from inflation, to the exclusion of far, far greater inefficiencies arising from dysfunctional financial markets and asset price bubbles.”

Such disparagements “of efforts to bear down on inflation … clearly signaled” to the author “that the time had come for remembering inflation” and its costs.  Granville does not accept the trade-off implied by Stiglitz, instead believing that monetary and financial stability are complements rather than substitutes, and fearing that the “risk of amnesia has been heightened by the early-twenty-first-century experience of boom and bust. … Worries about inflation had in any case long since subsided simply as a result of inflation being brought under reliable control.”  It had begun to be seen as “yesterday’s problem” (p. ix).

Granville lets her heroes make their “case for prioritizing the control of inflation,” which “would improve living standards in the long run [without] material short-term sacrifices” (pp. xi-xii).  Chapter 1, “The End of a Mirage,” surveys economists’ views of money’s effects from Hume to Keynes to the comeback of classical principles and the importance of expectations, of which we were reminded by the stagflation of the 1970s.

The problem of inflation has stemmed from central bank financing of government budget deficits, which brings us to the decisions in many countries after the 1970s to address the problem.  Bringing inflation down can be costly, although there are ways, especially through credible policies, to reduce those costs.

The rest of the book delivers good news and bad news.  The good news is that we understand inflation and how to control it.  Highly publicized structural changes such as globalization or financial developments have not altered the cause or cure of inflation, which has remained always and everywhere a monetary phenomenon.  The bad, or at least the tough, news is that the prevention of a recurrence of high inflation requires, in addition to a good memory of its costs, a reversal of society’s acceptance of large government debts.  That is not happening, with the expected results.  Discussions of public debt erosion by raising inflation targets have become popular, and the Fed’s massive balance sheet reveals a presumption that monetary stimulation is worth the risk of inflation.  Déjà vu.

John H. Wood is the author of A History of Central Banking in Great Britain and the United States (Cambridge University Press, 2005).

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