The Effects of Chronic Inflation on Resource Allocation: towards understanding non-neutrality of monetary inflation

Abstract

This paper attempts to provide an in-depth discussion on the ways in which chronic inflation distorts efficientallocation of resources in an economy. The rate of inflation in some developing countries has been high andvolatile, and the rate of adjustment of the nominal variables is quite low both in the short and long-run. Theprocess of adjustments is not only low but also less systematic thereby adversely affects contracts denominatedin money and money terms. The study also highlights some likely distortions arising from anti-inflationarymeasures such as usury laws and other state controls, and their likely impacts on long-term finance andimplications for rate of urban development in less developed countries. However, the study concludes thatmonetary inflation is non-neutral on resource allocation as it erodes the real value of money and monetary assets.Therefore, we recommend that given the severity of the distortions and its associated costs there is the need foran effective monetary correction mechanism.Keywords: Inflation, monetary contracts, non-neutrality of money, Resource allocation