“Incentives-Based” Stabilization Policies and the Evolution of the Macroeconomic Problem

Abstract

Inflation is by definition a rise in the price level. We cannot say whether there is a case for what I prefer to call “incentives-based” stabilization policies, such as those proposed at this conference, without first confronting the question of why prices change. Obviously one reason that prices in general change is that aggregate demand frequently fluctuates, whether because of changes in monetary or fiscal policy or whatever, whereas the economy’s capacity to produce usually does not change appreciably in the short run. If the demand in money terms for output increases substantially when the supply of output in real terms is unchanged, there will, of course, tend to be a rise in prices — more money will be offered for the same amount of goods and a given amount of money will buy less in the way of goods than before.