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By Frank H. Hahn

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Additional info for Aspects of Monetary Theory: 352. Sitzung am 5. Oktober 1988 in Düsseldorf

Sample text

Perhaps . . it is because there is really very little to say about the subject . . The real logic or psychology of ordinary conduct is rather a neglected branch of inquiry. The processes of intuition or judgment, being unconscious, are inaccessible to study. Despite this avowed frustration, Knight cannot conceal a clear conviction: We perceive the world before we react to it, and we react not to what we perceived, but always to what we infer . . The universal form of conscious behavior is thus action designed to change a future situation inferred from a present one .

Allais’s HRL formulation can be interpreted as a general theory of expectations under uncertainty. It puts numbers on a range of concepts, which play a central role, albeit a purely literary one, in the discussion of endogenous financial instability, along the directions outlined by Irving Fisher, Hyman P. Minsky, and Charles P. 17 In Allais’s HRL formulation, the elasticity of expectations varies dynamically between almost 0, in a deflationary environment, and 1 during hyperinflations. As for the demand for money, it is a monotonic, decreasing, bounded nonlinear function, the elasticity of which with respect to ‘‘expected” inflation varies between almost 0, in deflationary conditions, and −1, when hyperinflation is rife.

First, it takes time for interest rates to adjust to price movements. Second, this adjustment is generally inadequate (partial). According to Fisher, the ‘‘borrowing class” (or the ‘‘managers of capital”) tends to have better foresights than lenders. This is so because these managers are in a position where they are the first to know of pressures on prices. Hence, they have an advantage over lenders when it comes to assessing the return on capital employed. In short, rising prices tend to inflate profits.

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