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Conflict inflation: an open economy approach

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  • Leonardo Vera
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    Abstract

    Purpose – This paper seeks to draw together the various essential elements of the conflict inflation approach within the context of an open economy and to highlight the importance of global external factors in explaining inflation. Design/methodology/approach – A theoretical framework is proposed based on a model with a few simple building-blocks. A supply side relationship that determines the trade-off between a stable distribution of income and the external balance is first derived. As a second step the model combines the supply side relationship with James Meade's analysis of the relation between internal and external balance. Findings – The study first shows, in the context of an small open economy, relevant trade-offs among three crucial macroeconomics targets – external balance, internal balance, and workers/firms' aspiration balance. It then disentangles the adjustment mechanism that explains how an adverse balance of payments shocks may lead eventually to the breakdown of the conflicting claims equilibrium and inflation. Finally, it provides analytical reasons for believing that the focus of globalization (sustained and higher world demand and strong global competitiveness) is the main cause of global disinflation. Research limitations/implications – The present study provides a starting-point for further theoretical developments within the conflict inflation approach and requires empirical testing. Originality/value – The open economy conflict inflation framework could prove to be useful in improving the understanding of the relationship between global external forces and domestic inflation.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

    Volume (Year): 37 (2010)
    Issue (Month): 6 (September)
    Pages: 597-615

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    Handle: RePEc:eme:jespps:v:37:y:2010:i:6:p:597-615

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    Related research

    Keywords: Economic processes; Exchange rates; Foreign exchange; Trade;

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    References

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    1. Joshua Aizenman, 2007. "Large Hoarding of International Reserves and the Emerging Global Economic Architecture," NBER Working Papers 13277, National Bureau of Economic Research, Inc.
    2. Burdekin, Richard C. K. & Burkett, Paul, 1996. "Hyperinflation, the exchange rate and endogenous money: post-World War I Germany revisited," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 599-621, August.
    3. Watts, M.J., 1988. "Real Wages, The Wage Share and Cumulative Wage Indexation following a Currency Devaluation," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 18(1), pages 27-42.
    4. Ghosal, Vivek, 2000. "Product market competition and the industry price-cost markup fluctuations:: role of energy price and monetary changes," International Journal of Industrial Organization, Elsevier, vol. 18(3), pages 415-444, April.
    5. Katics, Michelle M & Petersen, Bruce C, 1994. "The Effect of Rising Import Competition on Market Power: A Panel Data Study of U.S. Manufacturing," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 277-86, September.
    6. Jose Antonio Cordero, 2004. "Devaluation, Conflict Inflation and Endogenous Growth in a Small Open Economy," EconoQuantum, Revista de Economia y Negocios, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 1(1), pages 3-15, Julio-Dic.
    7. Dag Kolsrud & Ragnar Nymoen, 1998. "Unemployment and the open economy wage-price spiral," Journal of Economic Studies, Emerald Group Publishing, vol. 25(6), pages 450-467, October.
    8. Feinberg, Robert M, 1986. "The Interaction of Foreign Exchange and Market Power Effects on German Domestic Prices," Journal of Industrial Economics, Wiley Blackwell, vol. 35(1), pages 61-70, September.
    9. Blecker, Robert A, 1989. "International Competition, Income Distribution and Economic Growth," Cambridge Journal of Economics, Oxford University Press, vol. 13(3), pages 395-412, September.
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    Cited by:
    1. Mario Cimoli & Gilberto Tadeu Lima, Gabriel Porcile, 2013. "The Production Structure, Exchange Rate Preferences and the Short Run – Medium Run Macrodynamics," Working Papers, Department of Economics 2013_12, University of São Paulo (FEA-USP).

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