Advanced Search
MyIDEAS: Login

A Strategic Theory of Inflation

Contents:

Author Info

  • Mordecai Kurz
Registered author(s):

    Abstract

    A strategic mechanism of price adjustment is introduced to explain inflations in the U.S. during 1909-1974. The mechanism follows from our theory that when the profit rate is above a normal-target rate, competitive forces operate to lower prices while if the profit rate is below the target a correlated strategy among firms operates to generate a rise in prices as a strategy to improve profitability. The notion of "correlated strategy" is adopted from game theory. The mechanism may operate in harmony or against demand and the net effect is what we call the "basic inflation." Contrary to a-priori notions of positive association between inflation rates and profit rates, our theory proposes a critical test of a negative association between these variables. Such a relationship is in fact empirically established. The analysis shows that large and persistent inflationary pressures are generated by low profitability and during 1971-1977 those accounted for some 20%-50% of total inflation. These pressures would be present even if no increase in cost occurs. This suggests that an important cause of the 1970's inflation is the low profit rate in the private sector and any public policy against inflation will fail if it does not aim at the same time to raise the profit rate on private capital.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.nber.org/papers/w0379.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0379.

    as in new window
    Length:
    Date of creation: Aug 1979
    Date of revision:
    Handle: RePEc:nbr:nberwo:0379

    Contact details of provider:
    Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Email:
    Web page: http://www.nber.org
    More information through EDIRC

    Related research

    Keywords:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Daniel Creamer & Martin Bernstein, 1956. "Personal Income During Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number crea56-1, May.
    2. Daniel Creamer & Martin Bernstein, 1956. "Introduction to "Personal Income During Business Cycles"," NBER Chapters, in: Personal Income During Business Cycles, pages 1-5 National Bureau of Economic Research, Inc.
    3. Fair, Ray C, 1970. "The Estimation of Simultaneous Equation Models with Lagged Endogenous Variables and First Order Serially Correlated Errors," Econometrica, Econometric Society, vol. 38(3), pages 507-16, May.
    4. Gerard-Varet, L. A. & Moulin, H., 1978. "Correlation and duopoly," Journal of Economic Theory, Elsevier, vol. 19(1), pages 123-149, October.
    5. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
    6. Robert J. Gordon, 1975. "Recent Developments in the Theory of Inflation and Unemployment," Discussion Papers 199, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    7. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-52, September.
    8. Franco Modigliani, 1958. "New Developments on the Oligopoly Front," Journal of Political Economy, University of Chicago Press, vol. 66, pages 215.
    9. Friedman, Milton, 1970. "A Theoretical Framework for Monetary Analysis," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 193-238, March-Apr.
    10. Ashenfelter, Orley & Johnson, George E & Pencavel, John H, 1972. "Trade Unions and the Rate of Change of Money Wages in United States Manufacturing Industry," Review of Economic Studies, Wiley Blackwell, vol. 39(1), pages 27-54, January.
    11. Friedman, Milton, 1971. "A Monetary Theory of Nominal Income," Journal of Political Economy, University of Chicago Press, vol. 79(2), pages 323-37, March-Apr.
    12. Robert J. Gordon, 1975. "The Impact of Aggregate Demand on Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(3), pages 613-670.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Julio J. Rotemberg & Garth Saloner, 1984. "A Supergame-Theoretic Model of Business Cycles and Price Wars During Booms," Working papers 349, Massachusetts Institute of Technology (MIT), Department of Economics.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0379. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.