| This study is a critique of the neoclassical monetarist approach to explaining episodes of high inflation. The monetarist approach is criticized from two perspectives: First, the monetary model employed is deficient in that it does not fully examine the consequences for money holders of a change in real balances held following an increase in the rate of nominal money growth. This has led to the conclusion that money holders cannot protect themselves from real balance effects and has led to the corollary that they will minimize money balances because of the possibility of high inflation. These actions by money holders, in turn, lead to a scenario where high inflation cannot be avoided. This has been ascribed to the problem of "time-inconsistency" and has reduced any examination of a government's motives for generating hyper-inflation to a trivia--it simply cannot be avoided when governments are tempted to garner revenue from inflation. The second criticism of the monetarist model is that a more thorough examination of the underlying motive for generating hyper-inflation is required.;The source of the monetarist deterministic high inflation result is sought by reviewing the development of the monetarist approach and is found in a limiting assumption ascribed to Sargent and Wallace. The importance of this assumption is highlighted by pointing to a number of debates to which the assumption is critical but has not been examined.;An alternative model is presented where determinism does not exist. This is because the model does not suffer from policy "sub-optimality" even though time-inconsistency is still present. Then, if determinism is not present, one is forced to re-examine the motives of a government in generating high inflation. A rent-seeking approach is presented, and applied to the case of Israel, where it becomes obvious that governments have used inflation as an instrument of redistribution rather than revenue generation. |
