Social Scientist. v 8, no. 95 (June 1980) p. 68.


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A Misspecified Inflation Model

ISHER J AHLUWALIA, BEHAVIOUR OF PRICES AND OUTPUT IN INDIA, The Macmillan Company of India Limited, 1979, pp VII ^-117, Rs 65.00.

A SURVEY of existing literature on inflation would show that there are many things in common among what is discussed under demand-pull, cost-push and structuralist hypotheses of inflation. Ever since the neo-classical economists formulated the theory of inflation in terms of the well-known quantity theory of money, the concept underwent several modifications, especially after the second world war, depending upon the economic conditions of the countries or the periods to which it applied. The celebrated Keynesian theory of inflation, A product of the grim post-war situation, is, in effect, a synthesis of the monetary and value theories. The Keynesian hypothesis, which views inflation as arising out of an excess of planned expenditure over income at full employment level, subsequently evoked the famous controversy regarding the price-wage flexibility concepts and led to the development of separate theories of demand-pull and cost-push inflation. The demand-pull theory has again broken up into monetarist and Keynesian. The structuralist hypothesis which ascribes sectoral imbalances to inflationary upsurge may some times find its essential roots in any of the above concepts. The rigid stance taken by different schools of thought on this subject is, therefore, ow rightly feels, more sentimental than factual.

Those who have attempted to study the Indian inflation have generally dwelt upon Keynesian hypothesesócither the aggregative model, which uses as its analytical tool the effective demand derived through the multiplier function of autonomous expenditure in the economy, or the econometric sectoral specifica-



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