Each factor affects the cost-benefit tradeoff of pursuing a highinflation policy. The first factor, which gets surprisingly little attention in my view, is financial innovation that alters the ability and incentive of a government to pursue a high-inflation policy. 7 I put the innovations into two main categories, developments in information technology and physical dollarization, both of which effectively increase potential competition among currencies.
These are not just theoretical considerations. While the effects of any tariffs on output and inflation may take time to materialise, falls in equity prices in response to the US announcement to impose a tariff on steel and aluminium, and prevailing uncertainty on the scope of any retaliatory measures, have already contributed to tighter financial conditions.