ABSTRACT OF PAPER
Title: John Maynard Keynes as advocate of price stability
Author: Barens Ingo, Caspari Volker
In the course of the First Big Financial Crisis of the 21st Century interest in Keynes’s contributions to economic theory and economic policy has been revitalised. Although various aspects of his thinking, like the paradox of saving, animal spirits and the lower bound of the rate of interest, are intensively discussed and referred to, his position on inflation (and deflation) has not yet been the object of comparable (re)evalution. The analysis covers Keynes’s earliest lectures on monetary theory up to his 1940 proposals aiming at financing the British war effort without inflation. Besides discussing Keynes’s analysis of the adverse effects of price instability on the allocation of productive resources, the distribution of incomes and wealth as well as social justice, special emphasis is given to the role of inflation in his General Theory of Employment, Interest and Money, his 1926 remarks on the French franc together with his 1931 remarks on the general fall of prices at the onset of the Great Depression. Concerning the General Theory of Employment, Interest and Money it is argued that the minor role played by inflation was not due to deflation being a problem for economic policy in the 1930s. Instead inflation only played a very minor role in this book because of theoretical reasons; Keynes focussed on situations of involuntary unemployment and was convinced that inflation would only arise if aggregate demand would be higher than compatible with full employment. Concerning his 1926 and 1931 remarks it is argued that Keynes’s interventions should not be understood as proposing a process of inflation as an instrument of economic policy; instead he pointed out the need for reflation, an one-time adjustment of prices to their previous levels compatible with money values stipulated in existing money contracts. As the (re)evaluation of Keynes’s position concerning inflation and deflation makes clear, during his entire career, spanning more than three decades, he was a staunch advocate of price stability.
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