THEORIES OF INFLATION AND ITS CURES : A SURVEY OF THE ASEAN LITERATURE

Abstract

This paper presents the various theories of inflation and its cures, and a review of ASEAN literature on inflation covering the period from 1960 to 1987. The objective is to examine the relevance or applicability of standard theories on inflation basically developed for Western economies on the inflation experiences of each ASEAN country, namely, Indonesia, Malaysia, the Philippines, Singapore and Thailand. At the same time the paper attempts to evaluate the respective countries’ performance in inflation control. The standard inflation theories are grouped under the aggregate demand and supply framework since it has greater flexibility in application. The Structuralist theory is separately grouped because it supposedly serves as an alternative inflation theory for LDCs. The cures of inflation are, therefore, classified based on the above grouping. Only major inflation periods are examined for respective countries and presented in a chronological order. ASEAN generally suffered from three major causes of inflation working in different proportions at different inflation periods. They are: (a) external factors; (b) structural factors; and (c) excess aggregate demand. Their policy responses consisted of mixed remedies ranging from standard monetary and fiscal restraints to supply-sided policies to ad hoc measures. Overall, they compared favourably to other LDCs in the success of controlling inflation. Among ASEAN themselves, however, the degree of success varies also. Finally, none of the standard theories alone is sufficient to explain the inflation experience of the ASEAN countries and hence an eclectic approach is suggested.