Macroeconomic instability: crisis, unemployment and inflation

MM-55i guruh talabasi Yandashova Parizoda

Macroeconomic instability: crisis, unemployment and inflation

As all of us know, macroeconomic stability is the basis of any successful effort for the development of private sector and economic growth. But today our theme is about macroeconomic instability and its consequences.

And generally known that macroeconomic instability is associated with the poor performance of the economic growth.

And inflation volatility is the first macroeconomic instability measure that we

consider. Friedman, a professor, argues that inflation volatility adversely affects allocative efficiency by increasing unemployment and decreasing growth. To be specific, inflation uncertainty hampers the allocative efficiency of the price system. He discusses that unanticipated changes in inflation will cause systematic errors of perception on the part of employers and employees that will initially lead unemployment to deviate from its natural rate.

As in the theme mentioned, inflation uncertainty increases precautionary savings due to lower output and this lowers the nominal interest rates however, inflation variability increases savings and creates the incentive to loosen monetary policy and thus decrease interest rates, which stimulates investment. If new investment is likely to increase capital stock that uses more advanced technologies will then increase.

Another fact that, inflation is the logarithmic first difference of the consumer price index. There are several factors that are named as potential determinant of the macroeconomic instability such as instability in inflation, incorrect fiscal policy, instability of real exchange rate and exchange relationship. The aforesaid factors are serious obstacles to the economic growth. In theoretical literature, effect of inflation is ambiguous on the growth.

When I was flicking through the internet I have found a fact. According to the Mandel and Tobin hypothesis, inflation has a positive effect on the growth, because, the anticipated inflation is led to the lower real interest rate and this issue is led to the change of portfolio of assets from real monetary asset to the real physical asset.

In conclusion I have to highlight that all these factors are the spin-offs of the surveys related to the elements of the theme.