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Extra resources for Monetary Economics: Theory and Policy
Proposals for the latter alternative involve making the central bank more independent of political pressure and/or endowing it with a longer time horizon and lower rate of time preference (cf. 12 A somewhat different angle on the credibility issue emerges in the analysis of Fischer (1986). 13 Hence, it is true that 'under the proper hypothetical conditions a government could eliminate inflation very rapidly and with virtually no Phillips curve costs in terms of foregone real output or increased unemployment' (Sargent, 1993, p.
2 In this view, the policymaker has an incentive to 'use up' any ex ante rule-based reduction of private-sector inflation expectations by implementing surprise expansions of the money supply ex post. As rational private-sector decisionmakers become aware of this 'dynamic inconsistency' problem, they are likely to be discouraged from lowering their inflation expectations in response to any preannounced policy of restricting the rate of money supply growth. 4 The conflict approach attributes inflationary pressure to an excess of real income claims (by labor, capital and government) over the real income available to satisfy these claims.
The problem with this criticism is that it conflates the conflict approach with particular theories or models developed within this broader analytical tradition. Although it is true that some analyses of conflict inflation formally take actual real income as given, many others do not. Rowthorn's (1977) Neo-Marxist monetary model, for example, incorporates the degree of monetary accommodation of income claims as a factor determining the level of effective demand, income and employment. Dutt's (1992, 1994) Post Keynesian analysis meanwhile locates conflict-inflation processes in a framework where the outcomes of distributional conflicts between capital and labor influence the subsequent growth of the 'pie' to be shared among competing claimants; in particular, because his model allows for differential savings propensities between labor and capital, a redistribution from one sector to the other will impact upon the level of effective demand and capacity utilization, thereby conditioning the level of investment and growth in the long run.