Changes in the explanation of inflation
DOI:
https://doi.org/10.35551/PFQ_2024_1_6Keywords:
inflation, Phillips curve, enterprise pricing, output gap, unemployment gap, E31, E47, E52Abstract
Most discussion of inflation in 2021-2022 have focused on product market shocks rather than unemployment indicators. The Phillips curve approach, which provides the traditional theoretical framework, was questioned. In addition to the surge in food and energy prices, many new inflationary factors have come to the fore, such as the disruption in supply chains, as well as fiscal spending and loose monetary policy in the context of the pandemic. These factors do not fit into the traditional approach. In this paper, we review the main literature on the US and European economies to see how the analytical framework represented by the Phillips curve can be adapted to analyse the current situation. Since its inception, the Phillips curve approach has undergone significant changes reflecting changes in the nature of inflation. For example, the unemployment gap was later replaced by the output gap. In the current situation, the output gap has been replaced by arguments in favour of the inclusion of enterprise pricing, marginal cost and the profit rate.
References
Ábel, I., Nagy, Gy. (2022). Views on inflation. Unfounded assumptions and unfalsifiable theories Foreign Economy, Vol. 66, September-October, 2022, (pp. 44-75) Foreign Economy (kulgazdasag.eu) https://doi.org/10.47630/KULG.2022.66.9-10.44
Balatoni, A. (2009). The Phillips curve and stop-go cycles in Hungary. Statistical Review, vol. 87, no. 9, pp. 898-920.
Balogh, A. (2021). What causes inflation? – The relationship between central bank policies and inflation. Credit Research Review, Vol. 20, No. 4, December, pp. 146-158.
Benigno, P., Eggertsson, G. B. (2023). ‚It’s Baaack: The surge in inflation in the 2020s and the return of the non-linear Phillips curve.’ NBER Working Paper 31197. Cambridge, Mass.: National Bureau of Economic Research. https://doi.org/10.3386/w31197
Bernanke, B. S. (2010) Monetary Policy Objectives and Tools in a Low-Inflation Environment. Speech presented at the Revisiting Monetary Policy in a Low-Inflation Environment Conference, Federal Reserve Bank of Boston, October 15, 2010.
Bernanke, B., O. Blanchard (2023). What Caused the U.S. Pandemic-Era Inflation? paper prepared for a conference-”The Fed: Lessons learned from the past three years”- at the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution. Bernanke-Blanchard-conference-draft_5.23.23.pdf (brookings.edu) https://brookings.edu/wp-content/uploads/2023/04/Bernanke Blanchard-conference-draft_5.23.23.pdf.
Bivens, J. (2022a). corporate profits have contributed disproportionately to inflation. how should policymakers respond?” Economic Policy Institute Working Economics Blog, April 21. https://www.epi.org/blog/corporate-profits-have-contributed-disproportionately-to-inflation-how-should-policymakers respond/ Accessed December 29, 2022.
Bivens, J. (2022b). Wage growth has been dampening inflation all along-and has slowed even more recently’, Economic Policy Institute, available at: https://www.epi.org/blog/wagegrowth-has-been-dampening-inflation-all-along-and-has-slowed-even-more-recently/.
Candia, B., Coibion, O., Gorodnichenko. Y. (2021) The inflation expectations of U.S. firms: evidence from a new survey. NBER Working Paper No. 28836. Cambridge, Mass.: National Bureau of Economic Research. https://doi.org/10.3386/w28836
Candia, B., Coibion, O., Gorodnichenko, Y., (2022). The Macroeconomic Expectations of Firms Bernardo Candia, Olivier Coibion, and Yuriy Gorodnichenko NBER Working Paper No. 30042 May 2022. https://doi.org/10.3386/w30042, Microsoft Word – CCG – 2021-12-26 – NBER WP
Coibon, O., Gorodnichenko, Y., Weber, M. (2021). ‚Monetary policy communications and their effects on household inflation expectations.’ NBER Working Paper 25482. Cambridge, Mass.: National Bureau of Economic Research. https://doi.org/10.3386/w25482
Cohn-Bech, E, Foda, K., Roitman, A. (2023) Drivers of Inflation, Hungary. IMF Selected Issues Paper (SIP/2023/004). Washington, D.C.: International Monetary Fund. Selected Issues Papers Volume 2023 Issue 004: Drivers of Inflation: Hungary (2023) (imf.org)
Comin, D., Callum J., Johnson, R. (2023) Supply chain constraints and inflation, NBER working paper 31179, April.
Crust, E. E., Lansing, K. J., Petrosky-Nadeau, N. (2023) Reducing Inflation along a Nonlinear Phillips Curve. Federal Reserve Bank of San Francisco Economic Letter 2023-17 | July 10, 2023. Reducing Inflation along a Nonlinear Phillips Curve | San Francisco Fed (frbsf.org)
De Loecker, J., Eeckhout, J., Unger, G. (2020) The Rise of Market Power and the Macroeconomic Implications, Quarterly Journal of Economics, vol. 135, no. 2, pp. 561-644. Available at https://doi.org/10.1093/qje/ qjz041
di Giovanni, J., Kalemli, S., Silva, A., Yildirim, M. (2023). quantifying the infla tionary impact of fiscal stimulus under supply constraints, American Economic Review Papers and Proceedings, forthcoming.
Domash, A. and L. H. Summers. (2022a). How tight are U.S. labor markets? NBER Working Paper 29739. Cambridge, Mass.: National Bureau of Economic Research. https://doi.org/10.3386/w29739
Domash, A., Summers, L. H. (2022b) A labor market view on the risks of a U.S. hard landing. NBER Working Paper 29910. Cambridge, Mass.: National Bureau of Economic Research. https://doi.org/10.3386/w29910
Domash, A., Summers L. H. (2022c). The relation between nominal and real wage growth. Medium.com, April 11. Link: https://medium.com/@alex.domash/the-relation-between-nominal-and-real-wage-growth-2bfd2e1b27b8
ECB, (2010) The „great Inflation” Lessons for monetary policy ECB Monthly Bulletin May 2010, pp. 99-110. The „Great Inflation”: lessons for monetary policy, Monthly bulletin, May 2010 (europa.eu)
Fair, R.C. (2021). What do price equations say about future inflation? Business Economics 56 (1): 118-128. https://doi.org/10.1057/s11369-021-00227-2
Fair, R.C. 2022.’A note on the Fed’s power to lower inflation.’ Business Economics 57 (1): 56-63. https://doi.org/10.1057/s11369-022-00254-7
Ferguson, T., Storm, S. (2023). Myth and Reality in the Great Inflation Debate: Supply Shocks and Wealth Effects in a Multipolar World Economy. International Journal of Political Economy 52 (1): 1-44. Link: https://doi.org/10.1080/08911916.2023.2191421
Friedman, M. (1968) The Role of Monetary Policy, American Economic Review Volume LVIII MARCH 1968 Number 1, pp. 1-17.
Friedman, M., Schwartz A. J. (1963) A Monetary History of the United States: 1863-1960. Princeton: Princeton University Press.
Gagliardone, L., Gertler, M. (2023) Oil prices, monetary policy and inflation surges. NBER Working Paper 31263. Cambridge, Mass.: National Bureau of Economic Research. https://doi.org/10.3386/w31263
Gagliardone, L., Gertler, M., Lenzu, S., Tielens. J. (2023). Anatomy of the Phillips Curve: Micro Evidence and Macro Implications. NBER Working Paper 31382. Cambridge, Mass.: National Bureau of Economic Research. https://doi.org/10.3386/w31382
Gagnon, J., Sarsenbayev, M. (2022). 25 Years of Excess Unemployment in Advanced Economies: Lessons for Monetary Policy (October 18, 2022) Peterson Institute for International Economics Working Paper No. 22-17, Available at SSRN: https://ssrn.com/abstract=4255161 or http://dx.doi.org/10.2139/ssrn.4255161
Galbraith, J. K. (2023) The Quasi-Inflation of 2021-2022: A Case of Bad Analysis and Worse Response FEB 2, 2023 | MMacroeconomics, The Quasi-Inflation of 2021-2022: A Case of Bad Analysis and Worse Response | Institute for New Economic Thinking (ineteconomics.org)
Galí, J., Gertler , M. (1999) Inflation dynamics: A structural econometric analysis, Journal of Monetary Economics, 44, 195-222
Glover, A., Mustre-del-Río, J, von Ende-Becker, A. (2023). How Much Have Record Corporate Profits Contributed to Recent Inflation? Federal Reserve Bank of Kansas City Economic Review – First Quarter 2023 pp. 23-35. https://www.kansascityfed.org/Economic%20Review/documents/9329/EconomicReviewV108N1GloverMustredelRiovonEndeBecker.pdf
Hobijn, B., Miles, R. A., Royal, J., Zhang, J. (2023) The recent steepening of Phillips curves. Chicago Fed Letter No. 475, January. https://doi.org/10.21033/cfl-2023-475
Humphrey, T. M. (1985) The Early History of the Phillips Curve (1985) Economic Review, vol. 71, no. 5, September/October 1985, pp. 17-24, Available at SSRN: https://ssrn.com/abstract=2118883
IMF (2022). World Economic Outlook (October 2022). Technical Report, International Monetary Fund, URL https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlook-october-2022.
Jordà, Ò., Liu, C., Nechio, F., Rivera-Reyes.F. (2022). wage growth when inflation is high. FRBSF Economic Letter 2022-25, September 6. https://www.frbsf.org/economic-research/publications/economic-letter/2022/september/wage-growth-when-inflation-is-high/
Konczal, M., Lusiani, N. (2022). Prices, Profits, and Power: An Analysis of 2021 Firm-Level Markups. New York: Roosevelt Institute. https://rooseveltinstitute.org/wp-content/uploads/2022/06/RI_PricesProfitsPower_202206.pdf.
Lapavitsas, C., Meadway, J., Nicholls, D. (2022). The True Causes of Inflation: Weak Production and High Profits September 2022 https://www.nautilusint.org/globalassets/public-resources/pdfs/the_real_causes_of_inflation_gftu.pdf
Nersisyan, Y., Randall, W. L. (2022). What’s Causing Accelerating Inflation: Pandemic or Policy Response? (March 4, 2022) Levy Economics Institute, Working Papers Series 1003 (2022), Available at SSRN: https://ssrn.com/abstract=4049894 or http://dx.doi.org/10.2139/ssrn.4049894
Phelps, E. Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time, Economica 34 (135): 254-281 DOI : 10.2307/2552025
Romer, C. D., Romer , D. H. (2023). Presidential Address: Does Monetary Policy Matter? The Narrative Approach after 35 Years, American Economic Review 2023, 113(6): 1395-1423 https://doi.org/10.1257/aer.113.6.1395 1395
Rudd, J.B. (2022a). Why do we think that inflation expectations matter for inflation? (And should we?) Review of Keynesian Economics 10 (1): 25-45. https://doi.org/10.4337/roke.2022.01.02
Rudd, J. B. (2022b). The anatomy of single-digit inflation in the 1960s. Finance and Economics Discussion Series 2022-029. Washington: Board of Governors of the Federal Reserve. https://doi.org/10.17016/FEDS.2022.029
Samuelson, P. A., Solow R. M. (1960) Analytical Aspects of Anti-inflation Policy, American Economic Review, 50(2): 177-194.
Smolyansky, M. (2023). End of an era: the coming long-run slowdown in corporate profit growth and stock returns, Finance and Economics Discussion Series 2023-041. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2023.041.
Stiglitz, J. E., Regmi, I. (2022). The Causes of and Responses to Today’s Inflation. Roosevelt Institute, https://rooseveltinstitute.org/wp-content/uploads/2022/12/RI_CausesofandResponsestoTodaysInflation_Report_202212.pdf
Stoller M. (2021) Corporate Profits Drive 60% of Inflation Increases
MATT STOLLER blog 2021. DEC. 29. Corporate Profits Drive 60% of Inflation Increases (thebignewsletter.com)
Storm, S. (2022) Inflation in the Time of Corona and War. Institute for New Economic Thinking Working Paper No. 185. New York: Institute for New Economic Thinking. Link: https://www.ineteconomics.org/research/research papers/inflation-in-the-time-of-corona-and-war
Storm, S. (2023).The Art of Paradigm Maintenance: How the ‚Science of Monetary Policy’ tries to deal with the inflation of 2021-2023.Institute for New Economic Thinking, Working Paper No. 2014. October 4th, 2023.WP_214-Storm-The-art-of-paradigm-maintenance.pdf (ineteconomics.org) https://www.ineteconomics.org/uploads/papers/WP_214-Storm-The-art-of-paradigm-maintenance.pdf
Szentmihályi Sz., Világi B. (2015). The Phillips curve – theoretical history and empirical implications. Hreditinstituteti Szemle, vol. 14, no. 4, December, pp. 5-28.
Weber, I.M., Wasner, E. (2023) Sellers’ inflation, profits and conflict: why can large firms hike prices in an emergency?. In Review of Keynesian Economics, Vol. 11.
Weber, I. M., D’Acunto,F., Gorodnichenko, Y., Coibion, O. (2022). The Subjective Inflation Expectations of Households and Firms: Measurement, Determinants, and Implications NBER Working Paper No. 30046 May 2022 https://doi.org/10.3386/w30046
Downloads
Published
How to Cite
Issue
Section
License
Authors assign copyright to Pénzügyi Szemle / Public Finance Quarterly. Authors are responsible for permission to reproduce copyright material from other sources.
