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Lecture

Structuralist vs Monetarist, Benefits from Education


Department
Economics
Course Code
ECO100Y1
Professor
Jack Carr

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Jan 21, ECO 324
Structuralist argue that inflation is a policy instrument because of shortages- inelasticities, food, foreign
exchange, tax revenue
Solution-price rise, limited inflation-30% per annum to promote higher investment, economic growth
Monetarist-Industrial country(US policy), similar to Washington Consensus
-The only valid way we have to preconditions for successful eco growth is a control on inflation-5%,
small federal deficit that is manageable
-balance of payments, foreign exchange rate stable
Monetarists Criticism of structuralist
-claim that structuralist program has faults:
-balance of payments problem
-inflation raise price of exports, balance of payment problem, solved by devaluation-raise price of
imports
-generates undesirable short run investment activities-scarce material, hoarding, luxury housing,
distortion in investments
-inflation discourages saving, encourages capital flight(take financial assets out of the country)
-inflation raises risk, all forms of domestic/foreign investment, not sure what wages are, entrepreneurs
cancel plans to invest due to risk
-inflation discourages resource allocation
-how to stop inflation at 25-30%, how to stop it from rising, runaway inflation
Reading 7.3, Kirkpatrick
-(}uó-76, industrial country avg inflation of 7%, developing country-avg 14%
-(}uì-86, industrial country avg inflation 4%, developing country-avg 20%
-(uÆ]}(µo]v[ôîU]v(o]}vÁ}uu}v]vo]vu]
Monetarist argue that when monetary expansion is used, it will not solve foreign imbalances
There can be other source of inflation imported into country, external shocks in foreign country
ð-OPEC raised prices, country had to use a lot of foreign exchange to get the oil
ð-76-world recession problem, trade in this period is usually north south, (industrial, developing
}µv]UZo}Á]v}u}µvÇ[Æ}]v]}v}(}P}ÁZ}(]vµ]o}µv]UÁZv
industrial countries do good, export increase
Curbing inflation means that interest rate rose to double digits, latin American countries had to meet
debt, have to pay much more interest payments, devaluation
]v[vuµZ(}uÆ}ZÇ}ZÁ]Á}µoZÀ
Channels for importing inflation form other countries
-imported goods at higher prices-petroleum cost is higher
-imported services, interest rates rising in the period of eighties strongly, more foreign exchange for
same international obligation
-international borrowing increases money supply, generates inflation
-rise in exports, more income into country, higher income, higher money supply, more inflation
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-import substitution strategy, put tariffs on imports, block imports, produce domestically, high cost
producers, expenses, cost of products are higher, inflationary
Structural]PµZ](µ]v(o]}vUZ[u}P}ÁZ
WHO DO YOU SUPPORT in developing countries monetarist or structuralist
Structuralist object to stabilization programs:
-1929, trade dropped, no international agency to loan money to other countries, countries raised tariffs
to save jobs at home, trade almost stopped (beggar thy neighbor)
-ï-44 decided to set up agency to loan foreign exchange to avoid crisis
-each country make contributions to IMF fund, should the borrowing be at request, should it be made
on a conditional basis-IMF send a team to the country, tells country to decrease fiscal deficits, reduce
subsidies(make poverty more severe), country has to agree to conditions to get the loan
-balance your budget, control inflation, balance foreign exchange rate was the requirement
-structuralist oppose this stabilization
-US won debate-only conditional lending
-/(Ç}µ[Z}}v(}}Uu]PZ}v]ov(}uUÀÇ]((]µo}µ]v}]Uo}lv}v-
essential imports, promote exports, might end up causing inflation-bad for govt
Conclusion: Monetarist and Structuralist have moved toward the centre and each have good points
Bolovia-highest rate of inflation in Latin America-24000% in 1 year
-When new government came in power, they froze prices
-new currency, 6 digits taken off the bolovia currency
Stanley Fischer
-2nd person in command at IMF
-leader of teams that went to countries to assess countries
Hyper inflation
Cogan-hyper inflation-in the 1st month, rate of inflation is 50%, last month-50% or higher, duration 10
months minimum of 50% or higher
õðó-84-no example of hyper inflation
-]vðU]vo]vu]v}µv]ZZÀvZÇ]v(o]}v
Argentina-uÇôõ[uZ[õì-cumulative rate of inflation was 15,000%
Nicaragua-June ò-uZ[õí-58 months, cumulative rate of inflation-12 billion%
With such high rates of inflation-P}À[s position is damaged in 2 ways
-tax payers will defer payments, wait to pay with a cheaper currency, pay in diluted currency
-rates of high inflation reduce value of the tax received
-capital flight
High Inflation-country having a rate of inflation of more than 100%, in Latin America, this is prevalent
It appeared in periods, inflation, stable, inflation, on going process
1960-96- high inflation rates in the world, 17 episodes of 200%, 13 episodes 400%
Argentina-ð-}}[õí-208 months, cumulative rate of inflation was 4 billion%
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