WORLD INFLATION, THE DEMAND FOR MONEY AND FIXED EXCHANGE RATES
| Published date | 01 February 1978 |
| Author | George Zis,Nigel Duck |
| DOI | http://doi.org/10.1111/j.1467-9485.1978.tb01183.x |
| Date | 01 February 1978 |
Scottish
Journal
of
Political Economy,
Vol.
25,
No.
1, February 1978
WORLD INFLATION, THE DEMAND FOR
MONEY AND FIXED EXCHANGE RATES
NIGEL
DUCK
*
AND
GEORGE
ZIS
t
*University
of
Bristol and
t
University
of
Sarford
I
INTRODUCTION
The treatment of the world as an integrated economic unit has been the basic
feature of a number of recent studies, seeking to shed light
on
the causes of
inflation.' This world approach to the investigation of the causes of rising
prices views inflation as an essentially international monetary problem.
Therefore, the stabilisation/reduction
of
the world inflation rate, common to
all countries
on
fixed exchange rates, requires the control of the rate of
growth of the world money supply.
The main objective of this paper
is
to assess some
of
the objections raised
against the world approach
to
the study of inflation. We begin Section
11
by a statement of the criticisms that we wish to consider and, then, we
proceed to set out the analytic framework developed by Mundell (1971)
and Swoboda (1975). We utilise this framework for a demonstration of the
relationship between the world money supply and the world price level and
as a basis for evaluating the objections against the world approach. In
Section I11 we continue our evaluation of the criticisms by examining the
implications
of
relaxing the assumption that exchange rates are expected to
remain irrevocably fixed. Our conclusions, which we present in Section IV,
suggest that whilst it is a necessary condition for inflation to be
a
monetary
phenomenon, in
a
world of fixed exchange rates, that there must exist a
stable world demand for money function, it is not necessary in these circum-
stances that individual national demand for money functions of the
con-
ventional form
should be stable.
I1
Testing the hypothesis that inflation was an international monetary
phenomenon during the Bretton Woods system period is equivalent to
testing the hypothesis that inflation is a monetary phenomenon in a closed
We are indebted
to
M.
Artis, D. J. Coppock, D. Laidler, M.
T.
Sumner and
J.
Williamson
for their helpful comments on an earlier draft. Responsibility for any errors is
our
own.
See,
for example, the studies by Duck, Parkin, Rose and
Zis
(1976), Genberg and
Swoboda (1975), Heller (1976), Johnson (1973, 1979, Meiselman (1975), Parkin, Richards
and Zis (1976), Parkin (1977) and Shaw (1975). Swoboda (1975) provides a comprehensive
discussion of the hypothesis that inflation under fixed exchange rates
is
an international
monetary phenomenon.
Received in final form: 30 May 1977.
29
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