Wages, Exchange Rates, and the Great Inflation Moderation: A Post-Keynesian View
Levy Economics Institute, Working Papers Series No. 759
29 Pages Posted: 21 Mar 2013
Date Written: March 20, 2013
Abstract
Several explanations of the “great inflation moderation” (1982-2006) have been put forth, the most popular being that inflation was tamed due to good monetary policy, good luck (exogenous shocks such as oil prices), or structural changes such as inventory management techniques. Drawing from Post-Keynesian and structuralist theories of inflation, this paper uses a vector autoregression with a Post-Keynesian identification strategy to show that the decline in the inflation rate and inflation volatility was due primarily to (1) wage declines and (2) falling import prices caused by international competition and exchange rate effects. The paper uses a graphical analysis, impulse response functions, and variance decompositions to support the argument that the decline in inflation has in fact been a “wage and import price moderation,” brought about by declining union membership and international competition. Exchange rate effects have lowered inflation through cheaper import and oil prices, and have indirectly affected wages through strong dollar policy, which has lowered manufacturing wages due to increased competition. A “Taylor rule” differential variable was also used to test the “good policy” hypothesis. The results show that the Taylor rule differential has a smaller effect on inflation, controlling for other factors.
Keywords: Inflation, Taylor Rule, Post-Keynesian, Structuralist
JEL Classification: E12, E31
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Has the Business Cycle Changed and Why?
By James H. Stock and Mark W. Watson
-
Output Fluctuations in the United States: What Has Changed Since the Early 1980s?
-
Time Varying Structural Vector Autoregressions and Monetary Policy
-
Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck?
By Shaghil Ahmed, Andrew T. Levin, ...
-
On the Causes of the Increased Stability of the U.S. Economy
By James A. Kahn, Margaret Mary Mcconnell, ...
-
The Rise in Firm-Level Volatility: Causes and Consequences
By Diego Comin and Thomas Philippon
-
The Rise in Firm-Level Volatility: Causes and Consequences
By Diego Comin and Thomas Philippon
-
The Rise in Firm-Level Volatility: Causes and Consequences
By Diego A. Comin and Thomas Philippon
-
The Estimation of Prewar Gnp: Methodology and New Evidence
By Nathan S. Balke and Robert J. Gordon