Monetary Regimes and Inflation: History, Economic and Political Relationships, 2nd ed.

• Author: Makinen, Gail E.
• Position: Book review

Monetary Regimes and Inflation: History, Economic and Political Relationships, 2nd ed.

Peter Bernholz

Cheltenham, UK: Edward Elgar, 2015, 240 pp.

An extensive academic literature exists on central bank independence and economic performance, especially inflation. The conclusions drawn from these studies are obtained from regressions utilizing fairly recent data from both developed and underdeveloped countries. They draw a similar conclusion: when central bank independence is defined as the ability to refuse to finance a government's budget deficit, it improves the inflation performance of the economy. However, almost all of these studies suffer from one major deficiency: the data they use commingle observations from both fixed and flexible exchanges rate regimes. (For a discussion of these studies and their methodologies, see Marc Labonte, Central Bank Independence and Economic Performance: What Does the Evidence ShowP Congressional Research Service, Report RL31955.)

Peter Bernholz's Monetary Regimes and Inflation: History, Economic and Political Relationships is akin to this literature although, curiously, it is not mentioned in his study. This is the second edition of Bernholz's book. The first appeared in 2003 and much of its material is carried over to the second. There, are, however, several changes. First, Bemholz added one new hyperinflation to his discussion, the 2007-08 episode in Zimbabwe, and the book's cover now contains a picture of the 100 trillion dollar note issued by its central bank. That episode receives scant mention, however, other than that it shares performance characteristics with similar episodes.

Also, 19 additional pages of text are now included that deal with two subjects. The first, for many, is a surprise: during the financial crisis beginning in 2007, several countries (especially the United States) experienced a large increase in their monetary base, of a magnitude often associated with high or hyperinflations, without such a calamity occurring (at least not yet). The second subject, which concludes the book, seeks to explain how monetary regimes that yield stable (or low) inflation arise and why they exist for long periods.

Bernholz's methodology consists of reviewing a large number of inflationary episodes, both ancient and modern, to see if they display consistent patterns from which conclusions can be drawn. Most of the episodes are well known and extensively researched. His discussion adds little to what is already known, but the episodes are of interest when studied collectively to see what they share in common. This is ably done. Only two...