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Dispersion of Inflation Rates - Essay Example

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The writer states that inflation is one of the main and most complicated issues in macroeconomics. The aim of the paper is to discuss the process of international transmission itself and examines the interrelations between dispersion of national inflation rates and transmission…
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Dispersion of Inflation Rates
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Download file to see previous pages The inference is not necessarily correct: other explanations are equally logical and sufficiently important to be worth serious consideration. Many countries might experience inflation at the same time without international transmission of inflationary forces because they respond in the same way to common causes (Wickens 54). All countries have undergone long-period institutional and structural changes which, although not in themselves inflationary, have made them more vulnerable to inflation. One of these changes is a widespread increase in the resistance to reductions of nominal prices and wages. Another is the growing role of the public sector in most national economies, a development that may increase the vulnerability to inflation in a number of different ways, which are discussed in the appendix to this paper. Another possible cause of a decrease in the dispersion of rates of change in consumer prices and other comprehensive price indexes, such as gross national product deflators, is a convergence in the rates of productivity growth of different countries. These comprehensive price indexes tend to diverge from the corresponding national indexes of wholesale prices in degrees related to the growth in a country's productivity. If changes in national wholesale prices continue to be tied together, a convergence of national rates of productivity growth would cause a convergence of changes in their consumer price indexes and GNP deflators.

Gali (2008) underlines that monetary changes may directly release inflationary forces. In the monetary field, the development and expansion of the Eurocurrency market, even if it has not greatly increased the supply of what one chooses to call "money," has increased the supply of liquidity or reduced the demand for it. Similarly, the establishment of special drawing rights has provided a non-national addition to the international reserve assets of the recipient countries without increasing the liabilities of other countries. Other explanations of a decrease in the dispersion of inflation rates are also possible. For example, inflation rates may have been generated in many countries at the same time merely because cyclical expansion in a number of important countries coincided to an unusual degree. Although the probability that such similarity of movement in several large countries occurred by sheer coincidence may not be high, it is not so low as to be negligible; such synchronization has occurred at times in the past when the world economy is widely regarded as having been less integrated than it is now, and it occurred then to a greater extent than in some subsequent periods, as is indicated by the evidence cited in the appendix. 
As national inflation rates may converge without increased international transmission through market forces, so may such transmission increase without making inflation rates converge. Indeed, an increase in such transmission may even increase the dispersion of some measures of inflation. This may be more than a possibility with regard to the dispersion of consumer price indexes. ...Download file to see next pages Read More
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