The Financial Effects of Inflation
Inflation has subjected financial markets and institutions to a series of unsettling developments that are far from complete and undoubtedly will continue in directions not yet clearly foreseen. In this non-technical description of events and survey of the literature, the authors examine the developments since the mid-1960s in financial markets and the behavior of four sectors of the economy—business, households, government, and financial intermediaries. They compare recent financial behavior under inflation with the theory, standard up to the mid-1960s, of how the economy adjusts to inflation. As the authors point out, "Central to all the departures from the standard theory is the fact that the market has failed to develop as asset that serves as a satisfactory hedge against inflation. Common stocks...have been inadequate over the past decade." The authors trace the reasons for this failure and the possible consequences for financial institutions and practices.