Research Discussion Paper – RDP 7503 Inflation in Industrial Countries: Two Theoretical Views

Introduction

The causes and cures of inflation are areas over which there is widespread disagreement among economists. Historically there have been two major schools in the modelling of inflationary mechanisms; the familiar demand-pull and cost-push approaches.

This paper discusses two theories which have tried to incorporate both aspects, but which do so in considerably different ways:

1. the excess demand-expectations theory, and
2. the normal price theory.

Sections II and III summarise the particular excess demand-expectations and normal price hypotheses respectively. Section IV attempts to isolate and evaluate the fundamental points of divergence between the models, and Section V provides some concluding comments.

Detailed mathematical expositions of the nor al pricing model and the excess demand-expectations models are presented in Appendix A below and Carmichael [1] respectively.