Kirshner, Jonathan. (2001). "The Political Economy of Low Inflation". Journal of Economic Surveys, 15(1), 41. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=4374154&site=ehost-live
First, Kirshner claims that the politics of low inflation have been under theorized by IPE scholars. He is about to remedy this problem by looking at current literature on the politics of inflation generally and focusing on three themes: “the economic costs of inflation, the concept of monetary neutrality from economic and political perspectives, and the importance of disaggregating economic growth statistics” (41). He then goes on to map out his approach to looking at the political implications of low inflation.
The first perspective on inflation examined is the sociological perspective. This sees inflation as an escape valve for societies to release sociological tension. “Inflation is a ‘bad thing’, although perhaps at times a necessary evil, because it is the symptom of underlying social conflicts within society” (43).
The next perspective examined is the neoclassical. This perspective emphasizes the assumption that inflation has economic costs. Actors will change their behavior in response to the perceived actions of governments in the face of inflationary pressures. “In order to avoid the costs of inflation and the pain of subsequent disinflation, it is crucial that monetary policy be de-politicized, that is, insulated from short term political pressures emanating from both interest groups and the government itself" (44).
The third perspective is that of the modern political economist. From this point of view the bad-guy is the state, who is responsible for inflationary pressures. From here, the state is looking out for its own interests, as an egoistic rent maximizer. “Inflation can help the government by increasing its wealth and by affecting its ability to stay in power” (44). Inflation can act as a tax on “cash holdings” (45). This causes the need to depoliticize the monetary process, thus the need for a central bank.
Kirshner then goes on to claim that most economic perspectives claim that there is an economic cost to inflation, but that this cost has never been empirically verified. He looks at literature and models on the subject and finds them to be inconclusive. “In sum, the deductive arguments regarding inflation are indeterminate” (48). “Thus, there is no good reason to believe that moderate inflation has a significant effect on economic performance, or that moderate inflation should be met with aggressive anti-inflationary policies” (50).
Then, why are there so many central banks being depoliticized, especially throughout the 90’s? “The solution to this puzzle is that the opposition to inflation lies in its political effects, not in its economic ones” (51). Inflation affects different groups differently. “Unanticipated inflation…benefits debtors at the expense of creditors, one reason why financiers have always been strong proponents of price stability” (52). The emphasis on price stability can be best understood through a micro-politics perspective, claims the author. From here, it becomes possible to see that there are distributional effects to inflation policy, and that these effects have real political consequences.
From the micro-politics perspective, “The level of inflation is the outcome of an interest group conflict regarding the level of inflation. The economic effects of inflation are dwarfed by these political factors” (59).
