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Wages, Exchange Rates, and the Great Inflation Moderation: A Post-Keynesian View

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Listed:
  • Nathan Perry
  • Nathaniel Cline

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.

Suggested Citation

  • Nathan Perry & Nathaniel Cline, 2013. "Wages, Exchange Rates, and the Great Inflation Moderation: A Post-Keynesian View," Economics Working Paper Archive wp_759, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_759
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    References listed on IDEAS

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    1. Marc Lavoie, 1992. "Foundations of Post-Keynesian Economic Analysis," Books, Edward Elgar Publishing, number 275.
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    Cited by:

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    2. Bentour, El Mostafa, 2015. "On the removal of energy products subsidies in an importing oil country: impacts on prices in Morocco," MPRA Paper 63635, University Library of Munich, Germany.

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    More about this item

    Keywords

    Inflation; Taylor Rule; Post-Keynesian; Structuralist;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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