A SPECIAL COST OF UNEXPECTED INFLATION: ARBITRARY DISTRIBUTIONS OF WEALTH
So far, the lost of inflation we have discussed occur inflation is steady and predictable. Inflation has an additional cost.Unexpected inflation redistributes wealth among the population in a way that has nothing to merit or need. These redistribution occur because many loans in the economy are specified unit of account-money.
I ‘ Consider an example. Suppose that Sam Student ( II . $20,000 loan at a 7 percent interest rate from Big bank to attend college. In 1°years, the due. After his debt has compounded for 10 years at 7 percent, Sam will owe Big bank $41) value of this debt will depend on inflation over the decade. If Sam is lucky, the economy. In this case, wages and prices will rise so high that Sam will be able to pay the out of pocket change.economy goes through a major deflation, then wage .find the $40,000 debt a greater burden than he anticipated.
This example shows that unexpected changes in wealth among debtors and creditors. A hyperinflation enriches Sam at the real value of the debt. Sam can repay the loan in less valuable. Deflation enriches Big bank at Sam’s expense because it increases the real value of debt case, Sam has the loan in more valuable dollars than he anticipated were table.
This cost Of unexpected inflation is important to consider together with another fact: Inflation is especially volatile and uncertain when the average rate of inflation is high. This is seen most simply by examining the experience of different countries. Countries with low average inflation, such as Germany in the late 20th century, tend to have stable inflation. Countries with high average inflation, such as many countries in Latin America, tend to have unstable inflation. There are no known examples of economies with high, stable inflation. This relationship between the level and volatility of inflation points to another cost of inflation. If a country pursues a high-inflation monetary policy, it will have to bear not only the costs of high expected inflation but also the arbitrary redistribution of wealth associated with unexpected inflation.