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Discuss what are the negative economic and social

implications of high inflation


It cannot be denied, that inflation, in general terms, has an impact
on people’s lives and the state of an economy. Inflation is
characterised by the increase in prices and services over a period of
time as well as the erosion of prices of loans and bonds, however the
real effects on the economy involve more than just a rise in price
levels.
Depending on the actual level of inflation and the state of an
economy, inflation can affect many factors in the external economic
and social environment, such as the growth of an economy, output
levels, investment, efficiency or rate of capital accumulation.
Furthermore, inflation is dependent on the time span and levels of
the inflation – certain countries during certain periods of time in
Latin America and namely Israel, have had higher levels of inflation
for some years. This had for some time had not affected the economy
negatively, however with time, this changed in some cases, for the
worse.
A quote that encompasses most factors under high inflation comes from
J.M. Keynes who states where « … (when) the real value of the
currency fluctuates wildly from month to month, all permanent
relations between debtors and creditors (…) become so
utterly disordered as to be almost meaningless; and the process of
wealth-getting degenerates into a gamble and a lottery.»1

The topic of negative economic and social implications of high


inflation has been researched by scholars and academics alike.
Empirical evidence collected by these researchers has tended to show
fundamental relationships, which will be discussed: namely the
‘inflation and growth’ (M. Bruno and W. Easterly; S. Fischer);
‘inflation and social factors’ (D. Elson and N. Cagatay; W. Easterly;
S. Fischer)

However, it has been often debated to these relationships. It must be


said that it is known for Historically, there have been many
occurances of high inflation, in some cases catastrophic
hyperinflation in the XX century, and have had damaging effects on
economies and society. Yet we must state that fact that, for
instance, in the 1960s during the age of the Phillips Curve, it was
understood by Tobin and Sidrausky, that the higher level of inflation
experienced by a country was seen to be beneficial and a positive
relationship could be established between that and the growth rate in
an economy, regardless of the time span and of previous historical
events. At the time, there were even no IMF papers to suggest a
relationship between inflation and growth2. Yet with time, as it
showed after the numerous events of the 1970s, academics had come to
understand that there were underlying and visible negative
relationships between inflation and the economy and growth of it.

1
M Bruno, W Easterly, 1996. Inflation and Growth: In Search of a Stable Relationship. Federal
Reserve Bank of St.Louis, May/June 1996. p. I
2
Ibidem p.I