Abstract
THIS PAPER concerns itself with a specific facet of inflation, namely the probable impact of inflation on the composition of investment. The central question in this context may be formulated in the following manner: If an inflationary situation—or the expectation of one—is superimposed on the existing structure of market opportunities in a less developed economy, what are likely to be the effects on the investments made by businessmen? In this connection, it is necessary to insist that statements regarding the probable direction of investment under inflationary conditions require an examination of the nature and comparative attractiveness of investment outlets within an economy. Put differently, it may be postulated that if stability of prices is expected there will be a certain “investment mix” composed of various forms of capital, with various degrees of capital intensity, which the community, acting freely, wishes to achieve. If prices are expected to rise, there will be a different mix of investment. In what way does an inflationary environment, directly or indirectly, change the disposition of investors so to allocate their investment resources as to deviate from the “stability” investment mix? In the present paper, a theoretical exposition of this question will be followed by an attempt at empirical verification of some of the theoretical arguments.
THIS PAPER concerns itself with a specific facet of inflation, namely the probable impact of inflation on the composition of investment. The central question in this context may be formulated in the following manner: If an inflationary situation—or the expectation of one—is superimposed on the existing structure of market opportunities in a less developed economy, what are likely to be the effects on the investments made by businessmen? In this connection, it is necessary to insist that statements regarding the probable direction of investment under inflationary conditions require an examination of the nature and comparative attractiveness of investment outlets within an economy. Put differently, it may be postulated that if stability of prices is expected there will be a certain “investment mix” composed of various forms of capital, with various degrees of capital intensity, which the community, acting freely, wishes to achieve. If prices are expected to rise, there will be a different mix of investment. In what way does an inflationary environment, directly or indirectly, change the disposition of investors so to allocate their investment resources as to deviate from the “stability” investment mix? In the present paper, a theoretical exposition of this question will be followed by an attempt at empirical verification of some of the theoretical arguments.
Recent literature on the problems of economic growth has assigned a central role to capital formation. Attempts at what is now termed “development programing” place considerable emphasis on measures designed to raise the rate of capital formation and to exert some guidance over the channeling of investment resources into what is believed to be their most productive uses. Though this latter objective has been recognized to be of paramount significance in the process of growth, surprisingly little attention has been devoted to what may be one of its more important aspects. There is sufficient evidence to indicate that for various reasons the less developed countries today are more vulnerable to inflationary pressures than their now more developed counterparts were in their own early stages of development. This being so, the possibility that inflation may influence the composition of investment in a way detrimental to development makes inflation additionally significant to developing countries.
Inflation, or the expectation of inflation, is generally accompanied by three major factors that have a bearing on the composition of investment: (1) a magnification of the illiquidity risk; (2) uncertainty; and (3) a changing spectrum of profit opportunities arising mainly out of measures taken to correct the symptoms of inflation. It is here suggested that the impact of inflation on the direction of investment may be explained by these factors.
Bernstein and Patel have maintained that continuous inflation induces the wrong kind of investment.1 According to them, inflation tends to widen the gap in returns between investment whose social benefits are high (e.g., agriculture and industry) and investment whose private benefits are high (e.g., inventories, luxury housing, etc.) in favor of the latter. The windfall profits and capital gains associated with inflation broaden the scope for privately profitable investments and direct resources to them at the expense of socially profitable investments. This contention requires scrutiny in order to clarify the process through which the reallocation of investment resources is accomplished.
The pressures that inflation exerts on the type of investment which the community desires to undertake are reflected in the distribution of new savings between financial and physical assets, on the one hand, and between different types of physical assets, on the other. The source of the general distorting effect of inflation on investment is to be found in the influence which inflation exercises on the desires of savers to distribute their acquisition of assets between financial and physical assets.2 This can be explained by reference to two conceptually distinct phenomena that are likely to be brought about by an inflation. The first arises from the impact of inflation on the structure of liquidity. Specifically, it is argued below that economic units fear that those assets that protect their liquidity in times of stability will fail to protect them during inflation. Consequently, the desire to protect their liquidity will, in itself, induce economic units to have a structure of assets when they expect prices to rise that is different from the structure which they wish to maintain when they expect prices to be stable. The second arises from the impact of inflation on the degree of liquidity sought. To the extent that an inflationary environment increases the frequency of unforeseen opportunities for advantageous purchases, it also increases the desire for liquidity. Hence, the “illiquidity risk—that is, the risk of not being able to withdraw from a commitment, once entered into, should the owner wish to change the disposition of his assets subsequently,”3 is magnified. Consequently, this may affect the decisions of investors in allocating their assets between the various forms of assets open to them.
The argument of the preceding paragraph may be clarified by spelling out the attributes of liquidity and some of its motives. Money has always been held to be the most liquid of all assets; in fact, the close association between money and liquidity has often blurred the meaning attached to liquidity. It is generally held that there are two qualities which money possesses in an especially high degree; 4 the word “especially” is here emphasized, for, as Keynes put it, “There is, clearly, no absolute standard of ‘liquidity’ but merely a scale of liquidity—a varying premium of which account has to be taken, in addition to the yield of use and the carrying-costs, in estimating the comparative attractions of holding different forms of wealth.”5 The two relevant qualities which money possesses in the eyes of investors are safety and future salability. In times of monetary stability, money is held because it is safe in exchange. This is the quality of money which economists have often described as a “store of value.” In times of inflation, money ceases to be a safe “store of value.” The salability attribute of money is derived from the “medium of exchange” characteristic of money. Despite the existence of inflation, money, as long as it continues to be legal tender, does not lose this attribute. Thus the future salability of money is in no way reduced by the fact that money is depreciating during inflation.
These two properties of money, safety and future salability, are often lumped together under the term liquidity. The distinction here made is necessary in order to show that during periods of inflation money loses part of the attribute of liquidity, as do financial assets denominated in money terms.6 This being the case, in periods of inflation savers can be expected to shift their assets toward physical assets and away from financial assets.
To be sure, investors will believe that some physical assets are relatively more liquid, for if the proposition that liquidity is not an absolute, but a relative, attribute, is accepted, and if it is noted that money loses part of its attribute of liquidity, then other forms of holding assets will gain liquidity. This added liquidity may be attributable to the fact that, during periods when the rate of inflation is rising, the salability of certain physical assets may be increased as a result of shortages7 and their safety relative to money may be improved.
The magnification of the illiquidity risk attached to money and financial assets denominated in monetary terms is immediately apparent when the motives for liquidity are recognized. Among these motives is a desire to bridge the interval between the receipt of income and its disbursement. If this interval is long, and if prices are expected to rise, money may not be the most satisfactory form in which to hold assets for this purpose. Accordingly, asset holders will be induced to acquire physical assets during the interval to satisfy this motive for liquidity. Alternatively, liquidity is desired in order to take advantage of investment opportunities as they present themselves. To the extent that these opportunities present themselves more frequently in an economy characterized by inflation and uncertainty, the desired level of liquidity increases.8 Again, money and financial assets are an unsatisfactory form in which to attain the desired level of liquidity.
The conclusion drawn from the above analysis is that, during periods when prices are expected to rise, savers can be expected to shift the disposition of their assets away from financial assets and toward physical assets. In so doing, inflation may well influence the availability of savings, so that the supply of saving for investment is distorted away from the more effective investment opportunities.
This can be demonstrated if the argument is extended to take account of the effect of inflation on the capital market. It is generally accepted that the capital market, like any other market, plays a rational role in serving to bring about an optimum allocation of investment resources. It may be said that this allocative function would be completely carried out if all saving were required to be channeled through the capital market. Even in the absence of this extreme condition, the opportunity to lend through the capital market influences self-investment by economic units. In an environment where the expectation of rising prices exists, this influence is weakened, so that the capital market is even less able to fulfill its economic function. The bias toward physical assets, and away from financial assets, engendered by inflation encourages economic units to make investments directly rather than through the capital market. Accordingly, one of the effects of inflation is likely to be to convert economic units from wishing to be net savers to wishing to be net investors. As will be noted presently, this tendency may in turn be one of the factors affecting a preference for certain forms of investment.
Distribution of Investment in an Inflation
The specific pressures exerted by inflation on the distribution of physical assets which investors desire to acquire with their available funds may be separated into those that influence investment in inventories, in contrast to fixed assets, on the one hand, and those that influence investment in various forms of fixed assets, on the other. The latter category would include, among other things, influences making for investment in long-term projects with a long gestation period (e.g., housing), against short-term investments with a short gestation period.
It is generally agreed that an inflationary environment is accompanied by a bias toward inventory investment. However, the many explanations of this phenomenon given by various writers deserve scrutiny. While there is certainly a general tendency in this direction, a careful examination of the data leads to a more specific conclusion, viz., that a short period of inflation, or an acceleration in the rate of inflation, will encourage this diversion, but that, after an economy has become acclimated to a reasonably constant rate of inflation, the pressures encouraging inventory investment will become less strong.
The exponents of the traditional view agree with Myrdal: “It is … highly characteristic of all the underdeveloped countries that their business classes are bent upon earning quick profits not by promoting long-term real investment and production but by buying and selling … and other easier ways of making money…. There is a low propensity to save and to invest productively in new enterprises.”9 This peculiar tendency for the business class in the less developed countries to invest in inventories is also emphasized by Higgins, who states, “Most of these [the underdeveloped countries] suffer from a tendency for investment to be directed toward speculative holding of inventories, rather than to the establishment or expansion of productive enterprises. A constantly rising price level tends to aggravate this tendency by making speculation all the more profitable. Who will prefer a possible small gain over a long period, if assured of a large gain in a short period?”10 To a considerable extent, the same opinion is voiced by Bernstein and Patel,11 who explain the high propensity to invest in inventories in the less developed countries by reference to the difficulties inherent in undertaking and managing a well-conceived investment in agriculture and industry. The opportunities are increased, the writers maintain, during inflation, as businessmen accumulate profits from inflation.
The implication conveyed by the above statements is that businessmen in the less developed countries are somehow shortsighted and are characterized in their investment behavior by what has been termed a “high-unit-profit” mentality. Accordingly, it is believed that they prefer a high margin of profit on a small volume to a small margin on a large volume; hence an inclination toward investment in inventories. During periods of inflation, this inclination is said to be spurred. There may be some merit in these arguments. However, it is here submitted that, during inflationary periods, there are fundamental economic forces that are likely to give rise to a bias toward investment in inventories.
It has been pointed out that an inflationary environment leaves fewer suitable assets available to asset holders (since money and financial assets denominated in monetary terms lose part of their liquidity attributes) and increases the illiquidity risk. The combination of these forces exerts an economic bias favoring investment in inventories. Initially, the shift toward inventories may be said to be the result of money and financial assets losing part of their attributes of liquidity whereas the liquidity attributes of inventories are enhanced. During periods of inflation, supplies, especially of import goods, are likely to be deficient as prices continue to rise. Specifically, the salability and safety attributes of inventories are improved vis-à-vis money and financial assets. Hence, economic units that are seeking liquidity tend to alter the structure of their assets so as to substitute the former for the latter.
Further, to the extent that an inflationary environment is one that is characterized by a high degree of uncertainty regarding the future development of relative prices, and accordingly marked by sharp shifts in the spectrum of profit opportunities, another bias toward investment in inventories as against investment in fixed assets is introduced. In an economy where expectations of sharp increases in prices prevail, inventories have a liquidity value which fixed assets lack. On the other hand, fixed assets offer a prospective return which is relatively absent from the possession of inventories. Investors, when deciding to distribute their accumulating assets between inventories and fixed assets, may be expected to balance the liquidity value of inventories against the prospective return from the purchase of fixed assets. It is conceivable, in the long run, that the prospective return from fixed assets may counteract the adverse cost attached to the illiquidity risk inherent in their purchase. However, over and above the illiquidity risk attached to long-term fixed investment, there is the element of uncertainty, which must be reckoned with as a potent factor affecting investment decisions. In an environment of unstable prices and rising costs, the long gestation period involved in fixed investment increases the financial risks; these risks may hamper the completion of the fixed investment and consequently limit, if not eliminate, the prospective return thereon. Also, there is the economic risk attached to long-term fixed investment. The longer the planning period, the greater the risk in estimating changes in over-all supply and demand. Investments in inventories are less subject to this uncertainty.
In addition to the foregoing biases toward investment in inventories, it may be argued that, if inflation creates conditions in which investment must be mostly self-financed, then investment must be on a relatively small scale. Inventories, in contrast to fixed investment, fit this requirement. Furthermore, to the extent that an investment is not totally self-financed, it must be in a form that banks will finance. Financial institutions may well operate in such a way that borrowing for inventory purchases becomes relatively easy under inflation, and that the resulting increase in the relative supply of loanable funds for inventory purchases biases investment toward inventories. However, there is reason to believe that the influence of inflation on the distribution of investment between inventories and fixed assets in those countries characterized by sporadic inflation in an otherwise relatively stable environment will differ from its influence in those countries which have a long and continuous inflation. Specifically, it is arguable that long periods of inflation need not be associated with unduly large investments in inventories, while short periods of inflation may bias the composition of investment toward inventories. Two probable explanations for this proposition may be offered.
In the first place, a change in the community’s expectations regarding the future levels of prices may influence the structure of assets desired by individual economic units. If prices are expected to remain at their current levels, individual economic units will desire to distribute their total stocks of assets among money, other financial claims, inventories, fixed assets, and other assets in a certain pattern. But if prices are expected to rise, money and other financial assets may be considered less desirable stores of wealth for providing liquidity protection, and the community may wish to hold a larger portion of its total assets in the form of physical assets. Moreover, as the liquidity protection provided by inventories may appear to be greater than that provided by fixed assets, the community may wish to hold a higher proportion of its physical assets in the form of inventories than in fixed assets. However, there are strict limits to the shifts that may be made in the structure of a given stock of physical assets. Most of the changes result from the channeling of resources that become available for new investment into the most desired form of asset. Since the desired changes in the composition of the stock of assets may well be large in relation to the annual flow of investment, it may be expected that a substantial part of the resources available for investment may be devoted to inventory investment until the desired changes are achieved. Subsequently, the flow of investment resources will be divided between inventory accumulation and fixed asset formation in accordance with the ratio which the community wishes to maintain between these components of its stock of physical assets, unless the inflationary climate induces cumulative changes in the desired asset structure. However, in all probability, there are limits to the changes in asset structures which the community may desire, and hence a limit to the diversion of investment into inventory accumulation. That is, prior to a change in the desired structure of assets, the community’s investment in inventories will be related to the currently desired distribution of physical assets between inventories and fixed assets. Immediately after a change in price expectations, the community’s investment in inventories will be related to the desired increase in inventories which is consequent on this change; and insofar as the economy can produce the goods to go into stocks of commodities, the value of inventory investment will approach the total desired change. After the change in the distribution of physical assets is achieved, inventory accumulation will be related to the new desired structure of physical assets. Hence, in a brief inflation, or in the early stages of a longer inflation, it may be expected that there will be a marked diversion of investment resources toward the accumulation of inventories. While, in the later stages of a prolonged inflation, inventory investment may be expected to be somewhat higher than it was prior to inflation, it should be less than in the early stages of the inflation.
An alternative explanation of the proposition is possible. It has been pointed out that inventories differ from fixed assets in that returns from inventories may be realized at any time. Hence, in a short period of inflation, returns from newly acquired inventories may be realized without loss in real terms at the option of the holder. On the other hand, when an investor acquires fixed assets the result of his acquisition is to worsen the real value of the assets he acquires. Once mortar is put on a brick, it becomes used brick, rather than new brick. Once a steel beam is welded, it ceases to have general acceptability and, unless the investment for which it is designed is successful, its only value is as scrap steel. However, over a period of time the real value of investment in fixed assets may be realized, although it takes some time to achieve this result. But the situation changes in a long period of inflation, because there is then time for the real value of investment to be realized; if a prolonged inflation is expected —not an unrealistic assumption where the country has a long history of inflation—a bias toward investment in inventories may not develop. This suggests that, in discussing the impact of inflation on inventory investment, a distinction needs to be made between sporadic inflations and sustained inflations.
The implication of the above analysis is that inflation simultaneously encourages excessive investment in inventories, which is a form of short-term investment, and discourages long-term investment in fixed assets, at least for a short period. Nevertheless, it is frequently suggested by economists that an inflationary economy is characterized by excessive investment in luxury housing—a form of long-term fixed investment. At first sight, there appears to be a conflict between these two points of view. However, if it is realized that investment in housing and investment in inventories are the results of different types of pressure exerted by an inflation, the apparent paradox disappears. The strong inducement to invest in luxury housing for owner-occupiers is found in the effect of inflation on the desires of savers. Encouraged by inflation to acquire physical rather than financial assets, savers must find some asset which satisfies their demand. One of the physical assets most easily acquired by individuals is residential property. Hence, inflation may be expected to encourage the demand of individuals for houses. They may be houses for occupation by the purchaser or for rent. In many of the inflation-ridden economies, governments are prone to control the levels of money rents. Hence, the return on rental housing is prevented from rising in step with the increase in the price level. The outcome is that savers are encouraged to buy houses for self-occupancy and discouraged from investing in rental property. Though data on owner-occupation of houses are not available for most of the less developed countries, it is highly probable that the annual value of owner-occupied property forms a larger proportion of the annual value of all housing in an inflationary economy than in a relatively stable one.
It is here suggested that inflation, by simultaneously creating a state of uncertainty and affecting the spectrum of profit opportunities in alternative forms of fixed investment, may tend to direct the flow of private fixed investment into forms different from those that would have existed without inflation. In the current literature on economic development, bottleneck-creating disequilibria that may arise from imbalances between different sectors have been assigned a central role in arresting growth. Conceptually, these disequilibria are considered distinct from self-correcting disproportionalities. Inflation is a fertile source of bottlenecks. Insofar as it induces internal disequilibria of the bottleneck-creating type by directing investments into certain channels and away from others, it reinforces the factors often cited as giving rise to a low marginal efficiency of capital.
The element of uncertainty accompanying inflation will bias investments away from those industries that are both capital intensive and marked by a long gestation period and toward short-term, short gestation forms of investment. Not unlike inventory investment, the latter will allow an investor to review his investment decisions more frequently. The most glaring examples of this bias are to be found in the disincentive attached to investment in social overhead capital and basic industries. The disincentive is accentuated further by the propensity of governments to cure the symptoms of inflation and not the causes of inflation. Governments are prone to react to inflation by instituting price controls on the output of these sectors and hence reduce their profitability in comparison with sectors where prices are not controlled. An inflationary economy where controlled and uncontrolled prices exist side by side is one where the distortion in the pattern of investment is likely to be the greatest.
Where price controls are imposed on agricultural products, or even the threat of such price controls exists, a disincentive to investment in this sector may well follow. The stagnation of agricultural output in Argentina and Chile during periods of inflation and of price control may well be explained in terms of this semirepressed inflation.
Empirical Investigation of Impact of Inflation
The empirical investigation of some of the theoretical postulates discussed above has been handicapped by the relative shortage of pertinent data on the composition of investments. Nevertheless, by using what little data are available, some tentative and, at best, suggestive hypotheses may be formulated here. It is important to note at the outset that net changes in inventory investment are affected by factors other than price changes or anticipated price changes. Thus the investment in inventories that is induced by inflation cannot, in most instances, be isolated completely. Notwithstanding this limitation, and the more serious limitations imposed by the degree of accuracy of inventory data in an inflationary economy of a less developed country, some light may be cast on the impact of inflation.
The first point to settle is whether less developed countries are more prone to inventory investments than are their more developed counterparts. Data on gross domestic investments for both the more and the less developed countries over the period 1953-59 have been classified into fixed and inventory investment.12 The results suggest that the less developed countries as a group show a marked bias in favor of inventory investment. Whereas, on the average, the less developed countries channeled approximately 10 per cent of gross domestic investment into inventories during these years, the corresponding figures for a random selection of developed countries averaged less than 5 per cent.
This finding suggests a number of questions regarding the relationship between the stage of development of these countries and their tendency to direct a larger share of resources to this form of investment. Is there any reason to believe that the stage of economic development as such, or the structure of the economy of a less developed country, creates an economic necessity for higher inventory requirements; or are the less developed countries more prone to such investments on other grounds? As will be noted later, the bias toward this form of investment cannot be explained altogether by the fact that the less developed countries have experienced a higher rate of inflation. A priori reasoning leads to no conclusive statement on this phenomenon. However, the argument can be put forth that, in the less developed economies, production is carried out by “less capitalistic” methods, in the sense that a relatively large amount of labor and a relatively small amount of fixed capital are applied to a relatively large amount of raw material. Under these circumstances, inventory investment would form a relatively large amount of total investment.
Within the group of less developed countries, there seems to be no observable relationship between the rate of inflation and the distribution of investment between fixed and inventory investment. That is to say, over the period 1951-59 those countries with a low rate of inventory investment were not those where the rate of inflation was low. However, as can be observed from Table 1, two countries (Brazil and Chile) with a long history of inflation show the lowest rate of average inventory investment over the period as a whole.
Distribution of Aggregate Gross Domestic Investment at Current Prices, 1951-59
In millions of domestic currency.
Measured by the year-to-year percentage change in the annual average of the cost of living index as reported in International Monetary Fund, International Financial Statistics.
Inventory figure has been adjusted to eliminate stocks of coffee and cotton in the public sector
Distribution of Aggregate Gross Domestic Investment at Current Prices, 1951-59
| Gross Domestic Investment1 | Investment in Fixed Assets | Investment in Inventories | Average Rate of Inflation2 | |||
|---|---|---|---|---|---|---|
| Amount1 | Per cent | Amount1 | Per cent | |||
| Chile | 1,332 | 1,310 | 98.4 | 22 | 1.6 | 40 |
| Argentina | 363,850 | 365,848 | 100.5 | −1,998 | −0.5 | 31 |
| Brazil3 | 1,021,900 | 958,900 | 93.8 | 63,000 | 6.2 | 20 |
| Mexico | 95,578 | 82,524 | 86.3 | 13,054 | 13.7 | 8 |
| Colombia | 21,190 | 19,570 | 92.4 | 1,618 | 7.6 | 7 |
| Peru | 52,971 | 48,548 | 91.6 | 4,423 | 8.4 | 7 |
| Ecuador | 13,798 | 11,807 | 85.6 | 1,991 | 14.4 | 2 |
| Philippines | 7,066 | 6,142 | 86.9 | 942 | 13.1 | 1 |
In millions of domestic currency.
Measured by the year-to-year percentage change in the annual average of the cost of living index as reported in International Monetary Fund, International Financial Statistics.
Inventory figure has been adjusted to eliminate stocks of coffee and cotton in the public sector
Distribution of Aggregate Gross Domestic Investment at Current Prices, 1951-59
| Gross Domestic Investment1 | Investment in Fixed Assets | Investment in Inventories | Average Rate of Inflation2 | |||
|---|---|---|---|---|---|---|
| Amount1 | Per cent | Amount1 | Per cent | |||
| Chile | 1,332 | 1,310 | 98.4 | 22 | 1.6 | 40 |
| Argentina | 363,850 | 365,848 | 100.5 | −1,998 | −0.5 | 31 |
| Brazil3 | 1,021,900 | 958,900 | 93.8 | 63,000 | 6.2 | 20 |
| Mexico | 95,578 | 82,524 | 86.3 | 13,054 | 13.7 | 8 |
| Colombia | 21,190 | 19,570 | 92.4 | 1,618 | 7.6 | 7 |
| Peru | 52,971 | 48,548 | 91.6 | 4,423 | 8.4 | 7 |
| Ecuador | 13,798 | 11,807 | 85.6 | 1,991 | 14.4 | 2 |
| Philippines | 7,066 | 6,142 | 86.9 | 942 | 13.1 | 1 |
In millions of domestic currency.
Measured by the year-to-year percentage change in the annual average of the cost of living index as reported in International Monetary Fund, International Financial Statistics.
Inventory figure has been adjusted to eliminate stocks of coffee and cotton in the public sector
Furthermore, in the less developed countries that experienced wide swings in the rate of inflation within the period 1951-59, a close association is found between the annual rate of inflation and the percentage share of gross domestic investment channeled into inventories. Thus, in Brazil where there was relative price stability (relative for Brazil) in the late 1940’s and up to 1951, inventory accumulation seems to have proceeded at a slow pace. A sharp rise in the rate of inflation in 1952 was associated with a sharp increase in the proportion of investment in inventories. Thereafter, and up to 1958, the rate of inflation was held at about 20 per cent per annum and inventory investments proceeded at a much slower rate. In Chile, though investment in inventories for the period as a whole was low, a sharp increase in the rate of inflation in 1954 and 1955 was associated with a sharp increase in inventory investment which was subsequently liquidated when inflation was highest. Similarly, in Mexico and Colombia where spurts of inflation were evident during the period, a high rate of inflation was accompanied by a rising rate of inventory investment.
These results suggest that long periods of continuous inflation were not associated with unduly large investment in inventories, but that short periods of inflation tended to bias the composition of investment toward inventories.13
Turning from an examination of the effect of inflation on the distribution of investment between inventories and fixed assets to an examination of the composition of investment in fixed assets only, one is faced with an almost complete lack of statistics. While there are some data on the distribution of such investment between construction and other capital acquisitions, the construction data identify housing construction in only a few cases, and in none of these is there a separation between owner-occupied and other housing. For the composition of other forms of investment almost no figures are available. Consequently, to arrive at the relation between inflation and the composition of fixed capital investment, it is necessary to use an unsatisfactory indirect measure. If changes in output/capital ratios are examined, one may obtain not a measure of the structure of investment but an approximation to an index of the efficiency of investment. Other things being equal, a high marginal output/capital ratio would suggest that recent investment by the economy had been highly productive. Conversely, a low ratio would suggest that the investment had been less productive, and one might presume that inflation had led to a misallocation of resources.
As explained above, an expectation of stable prices will suggest an optimum mix of investment resources; an expectation of rising prices will, in the opinion of investors, produce a different optimum. These optima, which may be called the “ideal” capital coefficients, are the most economical ratios between capital and output, given the relative prices of factor inputs, the composition of output, the state of technology, and the productivity of labor. The capital coefficient cannot be expected to remain constant if any of these conditions is not fulfilled. The significance of this consideration in this analysis will be demonstrated presently.
The “ideal” output/capital ratio is very similar to an equilibrium point whose usefulness is paramount for expositional purposes. What its level is for any one country is not the concern of this paper.
In given conditions, there are “ideal” ratios between any actual level of output and the capital stock, but it does not follow that these ratios will always be observed. They may be higher or lower: higher because it is conceivable that the capital stock was designed for a larger level of output than that which is now being produced; lower if the existing capital stock is being used more intensively rather than expanding the country’s capital stock in line with the rising output. Hence, in order that changes in the capital coefficients may have some comparative significance, it must be assumed that both the capital stock and the new flow of investment are fully used.
If, in any period, the marginal output/capital ratio is relatively high, it may be presumed that the investment undertaken is more efficient than earlier investment. Conversely, if the ratio is relatively low, it may be presumed that there is evidence of a misallocation. Is there a tendency for the average ratio to be different for periods of varying degrees of inflation within a country? To what extent may these changes be attributed to pressures exerted by inflation? The results of calculations for Argentina, Chile, and Colombia are given in Tables 2-3-4 14. For each country, periods of varying degrees of inflation are separated. On the basis of a series of annual variations in real gross domestic product and a series showing gross fixed capital formation, average ratios of marginal output to capital are calculated by relating each period’s annual average gross domestic fixed investment to that period’s annual average change in output (lagged one year.)15
Argentina: Rate of Inflation and Productivity of Investment at 1950 Market Prices
The variation appearing in any one year is the difference between that year’s gross domestic product and that of the following year.
Argentina: Rate of Inflation and Productivity of Investment at 1950 Market Prices
| Rate of Inflation | Gross Fixed Capital Formation | Average Gross Fixed Capital Formation for Periods | Gross Domestic Product (GDP) | Variation in GDP Attributable to Investment During the Year1 | Average Annual Variation for Periods | Average Ratio of Marginal Output to Capital for Periods | ||||
|---|---|---|---|---|---|---|---|---|---|---|
  | ||||||||||
| 1950 | 28 | 13,054 |  | 61,084 | 1,862 | | | .05 | ||
| 1951 | 35 | 13,490 | 13,280 | 62,946 | −3,206 | 663 | ||||
| 1952 | 39 | 13,297 | 59,740 | 3,333 | ||||||
| 1953 | 4 | 12,699 |  | 12,956 | 63,073 | 2,226 | | 2,682 | | .21 |
| 1954 | 4 | 13,214 | 65,299 | 3,139 | ||||||
| 1955 | 12 | 14,597 | | 14,428 | 68,437 | −589 | | 795 | | .06 |
| 1956 | 13 | 14,259 | 67,849 | 2,179 | ||||||
| 1957 | 25 | 16,986 | | 16,833 | 70,028 | 1,843 | | −806 | | −.05 |
| 1958 | 32 | 16,680 | 71,871 | −3,455 | ||||||
| 1959 | 114 | 68,416 | ||||||||
The variation appearing in any one year is the difference between that year’s gross domestic product and that of the following year.
Argentina: Rate of Inflation and Productivity of Investment at 1950 Market Prices
| Rate of Inflation | Gross Fixed Capital Formation | Average Gross Fixed Capital Formation for Periods | Gross Domestic Product (GDP) | Variation in GDP Attributable to Investment During the Year1 | Average Annual Variation for Periods | Average Ratio of Marginal Output to Capital for Periods | ||||
|---|---|---|---|---|---|---|---|---|---|---|
| ||||||||||
| 1950 | 28 | 13,054 | | 61,084 | 1,862 | | | .05 | ||
| 1951 | 35 | 13,490 | 13,280 | 62,946 | −3,206 | 663 | ||||
| 1952 | 39 | 13,297 | 59,740 | 3,333 | ||||||
| 1953 | 4 | 12,699 | | 12,956 | 63,073 | 2,226 | | 2,682 | | .21 |
| 1954 | 4 | 13,214 | 65,299 | 3,139 | ||||||
| 1955 | 12 | 14,597 | | 14,428 | 68,437 | −589 | | 795 | | .06 |
| 1956 | 13 | 14,259 | 67,849 | 2,179 | ||||||
| 1957 | 25 | 16,986 | | 16,833 | 70,028 | 1,843 | | −806 | | −.05 |
| 1958 | 32 | 16,680 | 71,871 | −3,455 | ||||||
| 1959 | 114 | 68,416 | ||||||||
The variation appearing in any one year is the difference between that year’s gross domestic product and that of the following year.
Chile: Rate of Inflation and Productivity of Investment at 1950 Market Prices
The variation appearing in any one year is the difference between that year’s gross domestic product and that of the following year.
Chile: Rate of Inflation and Productivity of Investment at 1950 Market Prices
| Rate of Inflation | Gross Fixed Capital Formation | Average Gross Fixed Capital Formation for Periods | Gross Domestic Product (GDP) | Variation in GDP Attributable to Investment During the Year1 | Average Annual Variation for Periods | Average Ratio of Marginal Output to Capital for Periods | ||||
|---|---|---|---|---|---|---|---|---|---|---|
| ||||||||||
| 1948 | 18 | 13.2 |  | 148.0 | 4.8 | | | |||
| 1949 | 18 | 15.7 | 152.8 | 7.0 | ||||||
| 1950 | 17 | 14.3 | 15.3 | 159.8 | −2.6 | 4.35 | .28 | |||
| 1951 | 22 | 15.0 | 157.2 | 20.7 | ||||||
| 1952 | 21 | 15.9 | 177.9 | 11.5 | ||||||
| 1953 | 25 | 17.6 | 189.4 | −15.3 | ||||||
| 1954 | 73 | 16.8 |  | 174.1 | 3.9 | | | |||
| 1955 | 75 | 19.7 | 17.7 | 178.0 | 1.3 | 3.60 | .20 | |||
| 1956 | 56 | 16.6 | 179.3 | 5.6 | ||||||
| 1957 | 33 | 16.4 | 16.4 | 184.9 | 4.4 | 4.40 | .27 | |||
| 1958 | 20 | 189.3 | ||||||||
The variation appearing in any one year is the difference between that year’s gross domestic product and that of the following year.
Chile: Rate of Inflation and Productivity of Investment at 1950 Market Prices
| Rate of Inflation | Gross Fixed Capital Formation | Average Gross Fixed Capital Formation for Periods | Gross Domestic Product (GDP) | Variation in GDP Attributable to Investment During the Year1 | Average Annual Variation for Periods | Average Ratio of Marginal Output to Capital for Periods | ||||
|---|---|---|---|---|---|---|---|---|---|---|
| ||||||||||
| 1948 | 18 | 13.2 | | 148.0 | 4.8 | | | |||
| 1949 | 18 | 15.7 | 152.8 | 7.0 | ||||||
| 1950 | 17 | 14.3 | 15.3 | 159.8 | −2.6 | 4.35 | .28 | |||
| 1951 | 22 | 15.0 | 157.2 | 20.7 | ||||||
| 1952 | 21 | 15.9 | 177.9 | 11.5 | ||||||
| 1953 | 25 | 17.6 | 189.4 | −15.3 | ||||||
| 1954 | 73 | 16.8 | | 174.1 | 3.9 | | | |||
| 1955 | 75 | 19.7 | 17.7 | 178.0 | 1.3 | 3.60 | .20 | |||
| 1956 | 56 | 16.6 | 179.3 | 5.6 | ||||||
| 1957 | 33 | 16.4 | 16.4 | 184.9 | 4.4 | 4.40 | .27 | |||
| 1958 | 20 | 189.3 | ||||||||
The variation appearing in any one year is the difference between that year’s gross domestic product and that of the following year.
Colombia: Rate of Inflation and Productivity of Investment at 1958 Market Prices
The variation appearing in any one year is the difference between that year’s gross domestic product and that of the following year.
Colombia: Rate of Inflation and Productivity of Investment at 1958 Market Prices
| Rate of Inflation | Gross Fixed Capital Formation | Average Gross Fixed Capital Formation for Periods | Gross Domestic Product (GDP) | Variation in GDP Attributable to Investment During the Year1 | Average Annual Variation for Periods | Average Ratio of Marginal Output to Capital for Periods | ||||
|---|---|---|---|---|---|---|---|---|---|---|
  | ||||||||||
| 1953 | 8 | 3,891 |  | 16,923 | 1,228 | | | |||
| 1954 | 9 | 4,721 | 4,550 | 18,151 | 731 | 774 | .17 | |||
| 1955 | −1 | 4,904 | 18,882 | 510 | ||||||
| 1956 | 6 | 4,686 | 19,392 | 628 | ||||||
| 1957 | 15 | 3,486 |  | 3,418 | 20,020 | 457 | | 834 | | .24 |
| 1958 | 14 | 3,350 | 20,477 | 1,211 | ||||||
| 1959 | 7 | 21,688 | ||||||||
The variation appearing in any one year is the difference between that year’s gross domestic product and that of the following year.
Colombia: Rate of Inflation and Productivity of Investment at 1958 Market Prices
| Rate of Inflation | Gross Fixed Capital Formation | Average Gross Fixed Capital Formation for Periods | Gross Domestic Product (GDP) | Variation in GDP Attributable to Investment During the Year1 | Average Annual Variation for Periods | Average Ratio of Marginal Output to Capital for Periods | ||||
|---|---|---|---|---|---|---|---|---|---|---|
| ||||||||||
| 1953 | 8 | 3,891 | | 16,923 | 1,228 | | | |||
| 1954 | 9 | 4,721 | 4,550 | 18,151 | 731 | 774 | .17 | |||
| 1955 | −1 | 4,904 | 18,882 | 510 | ||||||
| 1956 | 6 | 4,686 | 19,392 | 628 | ||||||
| 1957 | 15 | 3,486 | | 3,418 | 20,020 | 457 | | 834 | | .24 |
| 1958 | 14 | 3,350 | 20,477 | 1,211 | ||||||
| 1959 | 7 | 21,688 | ||||||||
The variation appearing in any one year is the difference between that year’s gross domestic product and that of the following year.
For Argentina and Chile, the findings suggest that periods of sharply rising prices were associated with relatively low average ratios of marginal output to capital, whereas the opposite was true in periods of low rates of inflation. For Argentina, for instance, four periods of differing rates of inflation can be isolated. A striking inverse relationship is found to exist between the rate of inflation and the average ratio of marginal output to capital in the different periods. Chile also shows the same phenomenon, though to a lesser degree than Argentina. However, for Colombia, for which available data permit only two periods of varying degrees of inflation to be considered, there appears to be a positive relationship between the rate of inflation and the average ratio of marginal output to capital. It is conceivable that this finding is due to the fact that the rate of inflation in Colombia was mild, compared with that in Argentina and in Chile. Nevertheless, the findings could equally well reflect the faults inherent in the use of the marginal output/capital ratio as an approximation to an index of the efficiency of investment.
A tentative explanation of the findings for Argentina and Chile may now be attempted. It was postulated earlier that the output/capital ratio for any country would be stable under a specified set of conditions. It is here proposed that the rate of inflation may upset this stability. First, it is suggested that a sharp increase in the rate of inflation will cause a change in the composition of output resulting partially from changes, or anticipated changes, in the relative prices of goods and services as the government controls, or attempts to control, the prices of the so-called essential commodities. This will exert an influence on the composition of investments, taking the form of a marginal reallocation of investment resources toward those sectors whose products are now favored by a higher than average increase in prices. To the extent that the latter investments are relatively less efficient that those which would have attracted investment in the absence of inflation, they are high input-low output investments. To be sure, there is no necessary presumption that these industries are any more or any less capital intensive than those industries that would have attracted investment in periods of relative price stability. Rather, during inflationary periods, the output/capital ratio will tend to fall as a result of a fall in its output component.
The low output/capital ratio associated with periods of inflation may also be a reflection of the widely held proposition that inflation tends to direct resources to housing, since it is generally believed that housing has a low output/capital ratio. In the absence of data on investment in private dwellings, a comparison of the general wholesale price indices and the price indices for building materials in inflationary and stable countries may be crudely indicative of the relative levels of demand for building materials in the two groups of countries. As Table 5 indicates, the rate of increase in prices of building materials, compared with that in general wholesale prices, was higher in the inflationary countries than in the stable countries. Admittedly, this roundabout method is, at best, suggestive of the impact of inflation on investment allocation; however, what little available evidence there is on investment in housing corroborates this suggestion.
Selected Less Developed Countries: Indices of General Wholesale Prices and of Building Material Prices, 1959 (1963 = 100)
Where the cost of living increased by 50 per cent or more between 1953 and 1959.
Where the cost of living increased by less than 50 per cent between 1953 and 1959.
Selected Less Developed Countries: Indices of General Wholesale Prices and of Building Material Prices, 1959 (1963 = 100)
| Countries with Price Inflation1 | Countries with Price Stability2 | ||||||
|---|---|---|---|---|---|---|---|
| General Wholesale Prices (1) | Building Material Prices (2) | Col. (2) ÷ Col. (1) (3) | General Wholesale Prices (4) | Building Material Prices (5) | Col. (5) ÷ Col. (4) (6) | ||
| Brazil | 305 | 354 | 116 | Guatemala | 102 | 107 | 105 |
| Chile | 1,053 | 1,086 | 104 | Lebanon | 102 | 108 | 106 |
| Colombia | 187 | 203 | 112 | Thailand | 115 | 103 | 90 |
| Iran | 123 | 168 | 137 | United Arab | |||
| Mexico | 143 | 161 | 112 | Republic | 117 | 109 | 93 |
| Paraguay | 297 | 193 | 65 | Syrian Arab | |||
| Peru | 181 | 187 | 103 | Republic | 101 | 104 | 103 |
| Spain | 149 | 155 | 104 | Venezuela | 104 | 98 | 95 |
| Turkey | 227 | 278 | 122 | Iraq | 106 | 107 | 101 |
| Range (excluding Paraguay): | 103-137 | Range: | 90-106 | ||||
Where the cost of living increased by 50 per cent or more between 1953 and 1959.
Where the cost of living increased by less than 50 per cent between 1953 and 1959.
Selected Less Developed Countries: Indices of General Wholesale Prices and of Building Material Prices, 1959 (1963 = 100)
| Countries with Price Inflation1 | Countries with Price Stability2 | ||||||
|---|---|---|---|---|---|---|---|
| General Wholesale Prices (1) | Building Material Prices (2) | Col. (2) ÷ Col. (1) (3) | General Wholesale Prices (4) | Building Material Prices (5) | Col. (5) ÷ Col. (4) (6) | ||
| Brazil | 305 | 354 | 116 | Guatemala | 102 | 107 | 105 |
| Chile | 1,053 | 1,086 | 104 | Lebanon | 102 | 108 | 106 |
| Colombia | 187 | 203 | 112 | Thailand | 115 | 103 | 90 |
| Iran | 123 | 168 | 137 | United Arab | |||
| Mexico | 143 | 161 | 112 | Republic | 117 | 109 | 93 |
| Paraguay | 297 | 193 | 65 | Syrian Arab | |||
| Peru | 181 | 187 | 103 | Republic | 101 | 104 | 103 |
| Spain | 149 | 155 | 104 | Venezuela | 104 | 98 | 95 |
| Turkey | 227 | 278 | 122 | Iraq | 106 | 107 | 101 |
| Range (excluding Paraguay): | 103-137 | Range: | 90-106 | ||||
Where the cost of living increased by 50 per cent or more between 1953 and 1959.
Where the cost of living increased by less than 50 per cent between 1953 and 1959.
Secondly, it is suggested that the marginal output/capital ratio will change in response to changes in the relative prices of factor inputs. This might well give rise to changes in the composition of investments. In a continuous and sustained inflation, wages may well tend to rise at a higher rate than the prices of factor inputs, such as imported capital equipment, creating a tendency toward more capital-intensive methods of production without an equal increase in output. This may have been true in Chile in the early 1950’s, when investment in agricultural machinery, as indicated by the dollar value of imports, assumed sizable proportions without any significant increase in agricultural production. The probability of such a shift is increased by the negative real rates of interest that are likely to accompany a sharp rate of inflation. In at least one country (Chile) for which data are available, the commercial bank rate never exceeded 16 per cent during a period when the annual rate of inflation averaged more than 60 per cent. This may well have given rise to a more intensive use of capital in production and hence to a lower output/capital ratio.
Thus, price distortions arising in an inflationary environment may well affect both factor and product prices in a manner leading to a relatively less productive allocation of resources, which in turn may be reflected in a low output/capital ratio.
There are obvious flaws in this analysis of the observed relationship between the rate of inflation and the marginal output/capital ratio. The first arises from the difficulties inherent in the statistical calculation of the ratio. The net addition to output derived from a unit of investment is conceptually difficult and statistically almost unmanageable. In an economy in which the level of consumption and the terms of trade are constantly subject to the impact of cyclical or random changes, it is virtually impossible to determine statistically what the net addition to output of total net investment is at any given period. Further, it can be argued that there are compelling difficulties in computing the “real” domestic product in a period of sharp inflation. If, for instance, national income data were to show a “computed” 5 per cent increase in real output and a 30 per cent increase in prices, the “true” figure for real domestic product might vary within not too negligible a margin. Also, it may well be that this bias in the data is not uniform all along the period under observation for any one country. However, the pertinent question is whether there is reason to believe that the bias is so distributed that it will cause a lower output/capital ratio during periods of inflation.
A nonstatistical drawback to the interpretation given is that an alternative hypothesis exists. It is conceivable that an increase in the rate of public investment accompanied by a budgetary deficit may be the important factor affecting the rate of inflation and, at the same time, owing to the composition of government investment, it may bring about a lower output/capital ratio. In other words, inflation cannot be said to be the cause of a lower output/capital ratio; rather, both phenomena flow from government expenditure. No attempt is made here to investigate this question. In this connection, a factor working in the opposite direction, viz., toward a higher marginal output/capital ratio, must be mentioned. If, before a sharp rise in the rate of inflation, the available productivity capacity is not fully utilized, the onset of the inflation may well result in fuller utilization of that capacity. Other things being equal, the ratio of marginal output to capital, as measured earlier, would then rise. The fact that it is lower in periods of inflation is indicative of the forces bringing about a lower output/capital ratio.
RESUME
Cet article a un double but. Tout d’abord il s’efforce de présenter un exposé théorique des conséquences probables de l’inflation sur la composition des investissements. On considère que l’inflation s’accompagne généralement de trois principales considérations qui influencent directement la composition des investissements: (1) le risque de non liquidité, c’est à dire le risque de ne pouvoir se soustraire à un engagement une fois qu’il est contracté, si le propriétaire désire modifier par la suite la disposition de ses avoirs; (2) l’élément d’incertitude qui accompagne inéluctablement l’inflation; (3) le spectre changeant des occasions de profit qui résulte principalement des mesures prises pour corriger les symptômes d’inflation. Dans le cadre de ces forces il est possible d’expliquer les incidences probables de l’inflation.
Plus précisément il est prouvé que l’inflation orientera la composition des investissements vers les avoirs réels et l’éloignera des avoirs financiers. En outre, dans les avoirs réels se manifeste en période d’inflation sporadique une tendance qui accentue l’importance du stockage et réduit celui de l’investissement fixe. Toutefois, pendant des périodes d’inflation continue et prolongée, il ne semble y avoir aucune tendance en faveur de la constitution excessive de stocks dans un but d’investissement. Il est en outre prouvé qu’à l’intérieur des capitaux fixes un climat inflationniste entrainera un changement dans la forme des investissements. Fondamentalement, l’investissement à brève gestation dans l’industrie légère est encouragé, par opposition à l’investissement à gestation de longue durée dans les industries de base.
Deuxièmement, les preuves empiriques de certaines de ces hypothèses sont examinées pour un certain nombre de pays insuffisamment développés. Dans une large mesure on constate à court terme un rapport étroit entre le taux d’inflation et le taux de l’accumulation des stocks dans les pays qui ont connu des degrés variables d’inflation. Une inflation longue et continue ne semble pas avoir été associée à d’importants investissements dans des stocks. Faute de données complémentaires sur la composition de l’investissement on a utilisé le rapport entre l’accroissement de la production et l’accroissement du capital comme indice brut du rendement de l’investissement et par suite de l’orientation probable de l’investissement pour trois pays qui ont connu à la fois des périodes de stabilité relative et des périodes d’inflation. En ce qui concerne l’Argentine et le Chili, les constatations font apparaître une tendance d’après laquelle le rapport moyen entre l’accroissement de la production et l’accroissement du capital est relativement faible en période d’inflation et plus grand en période de stabilité. Les données sur la Colombie montrent le contraire. Plusieurs interprétations possibles des constatations sont indiquées.
RESUMEN
Este estudio tiene un doble objetivo. En primer lugar, se trata de presentar una exposición teórica de los probables efectos que la inflación ejerce en la estructura de las inversiones. Se sostiene que la inflación da origen generalmente a tres consideraciones importantes, que influyen de una manera directa sobre las inversiones: (1) el riesgo de la falta de liquidez, que consiste en no poder desligarse de un compromiso una vez contraído en caso de que el interesado quisiera posteriormente modificar la distribución de sus activos; (2) el elemento de incertidumbre que va inevitablemente aparejado a la inflación; y (3) la gama cambiante de posibilidades de obtener utilidades que, más que todo, emana de las medidas que se adoptan para combatir las tendencias inflacionistas. Dentro del conjunto de estas fuerzas puede encontrarse la explicación de los efectos probables de la inflación.
En particular, se demuestra que la inflación influye en la estructura de las inversiones, orientándolas hacia los activos físicos y alejándolas de los activos financieros. En cuanto a los activos físicos existe, además, durante periodos esporádicos de inflación, la tendencia a encauzar las inversiones en forma acentuada hacia la acumulación de existencias, y alejarias de la adquisición de activos fijos. Sin embargo, durante largos periodos de inflacion continua y persistente, parece que no hay ninguna tendencia a hacer inversiones desme-suradas en la acumulación de existencias. Se demuestra, además, que dentro de los activos fijos, un ambiente inflacionista producirá un cambio en la estructura de las inversiones. Fundamentalmente, se estimulan las inversiones en industrias ligeras cuyo periodo de gestación es corto, en contrapositión con las inversiones en industrias básicas que requieren un largo periodo.
También se examina la evidencia empírica de estas hipótesis para varios países subdesarrollados, de lo que se desprende que en aquellos países que han experimentado grados variables de inflación existe, a corto plazo, una estrecha correlatión entre la tasa de inflación y la de acumulación de existencias. Aparentemente una inflación larga y continuada no está, asociada con grandes inversiones en existencias.
Debido a la falta de datos adicionales sobre la estructura de las inversiones, se ha hecho uso de la relatión marginal producto-capital como índice rudimentario de la eficiencia de las inversiones y, por consiguiente, de la orientatión probable de las mismas, para tres países que han experimentado periodos tanto de estabilidad como de inflación. En lo que a Argentina y Chile se refiere, los resultados indican que existe cierta tendencia a que el promedio de las relaciones marginales producto-capital sea relativamente bajo en periodos de inflación y más alto en periodos de estabilidad. En Colombia, los datos indican lo contrario. Se exponen además en este estudio las posibles interpretaciones de estos resultados.
Mr. Shaalan, economist in the Finance Division, is a graduate of Illinois College and of Columbia University. He was formerly Assistant Professor at the American University at Cairo, United Arab Republic.
E.M. Bernstein and I. G. Patel. “Inflation in Relation to Economic Development,” Staff Papers, Vol. II (1951-52), pp. 363-98.
In this context, financial assets refer to assets denominated in money terms; the purchase of equities is considered equivalent to the purchase of physical assets.
Nicholas Kaldor, “Economic Growth and the Problem of Inflation,” Eco-nomica, New Series, Vol. XXVI (1959), p. 288.
For details of this definition, see H. Makower and J. Marschak, “Assets, Prices and Monetary Theory,” Economica, New Series, Vol. V (1938), pp. 261-88. (Reprinted in American Economic Association, Readings in Price Theory, 1952, pp. 283-310.)
John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York, 1935), p. 246.
Presumably this is what Keynes had in mind when he stated, “Money itself rapidly loses the attribute of ‘liquidity’ if its future supply is expected to undergo sharp changes.” (Ibid., p. 241, fn. 1.)
Keynes, in discussing liquidity, singles out two characteristics that are required in order that the asset qualify as a “liquid” asset. These are inelasticity of production and of substitution. (Ibid., p. 241.)
It is sometimes suggested that an inflationary economy is not characterized by uncertainty, in the sense that people know, or think they know, the direction of prices. That may well be. However, in an environment where inflation has been rampant, certainty about the level of prices (as opposed to the direction) and certainty about the movement of relative prices in the future are less likely than they would be in a stable environment.
Gunnar Myrdal, An International Economy (New York, 1956), pp. 202-203.
Benjamin Higgins, Economic Development: Principles, Problems and Policies (New York, 1959), p. 464.
Op. cit., p. 383.
The classification is not reproduced here.
Though the data for Argentina are in line with this conclusion, it is believed that cattle stocks form a significant part of inventories and that the negative inventory investment recorded may be partially attributable to excessive slaughtering of cattle.
These countries are the only ones where both a high (except possibly Colombia) and a wide movement in the rate of inflation have occurred and for which the necessary data are available.
Basically, this method was used for Chile by Otto H. Korican in The Effects of Inflation Upon the Rate and the Productivity of Chilean Investment, 1949 to 1958 (U.S. Operations Mission to Chile, Staff Paper No. 1, August 1960).
Net figures rather than gross figures would have been more appropriate for the calculations given here. However, the use of gross figures need not seriously detract from the value of the resulting coefficients since the concern is with the movements of the coefficients rather than with their absolute levels.