Government Intervention in the Inflation Process: The Econometrics of "Self-Inflicted Wounds"
AbstractThis paper presents a single reduced-form inflation equation that can explain both the variance and acceleration of inflation during the 1970s.Inflation is explained by four sets of factors. Aggregate demand enters through the lagged output ratio and the growth rate of nominal GNP. The adjustment of inflation to changes in aggregate demand is limited by the role of inertia in the inflation process, expressed as the dependence of the rate of change of prices on its own past values. Two types of supply-side elements enter. Government intervention directly altered the price level during the Nixon control era, and in addition the government has aggravated the inflation problem by what have been called "self-inflicted wounds," including increases in the effective social security tax rate and effective minimum wage. Also there have been external supply shocks that are outside of the immediate control of the government, including changes in the relative prices of food and energy, changes in the growth rate of productivity, and changes in the foreign exchange value of the dollar. Considerable attention is given to alternative methods of estimating the impact of direct episodes of government intervention In the price-setting process, particularly during the Nixon controls. We find that such episodes have been futile. Because of their futility, these intervention episodes can be regarded as "self-inflicted wounds," like the payroll tax and minimum wage changes that normally are described by this term.
Download InfoIf 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.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0550.
Date of creation: Jul 1981
Date of revision:
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- Frye, Jon & Gordon, Robert J, 1981. "Government Intervention in the Inflation Process: The Econometrics of "Self-Inflicted Wounds"," American Economic Review, American Economic Association, vol. 71(2), pages 288-94, May.
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.:
- Feige, Edgar L. & Pearce, Douglas K., 1976. "Inflation and incomes policy: An application of time series models," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 2(1), pages 273-302, January.
- Robert J. Barro & Mark Rush, 1980.
"Unanticipated Money and Economic Activity,"
in: Rational Expectations and Economic Policy, pages 23-73
National Bureau of Economic Research, Inc.
- Robert J. Gordon, 1973. "The Responses of Wages and Prices to the First Two Years of Controls," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 765-780.
- Oi, Walter Y., 1976. "On measuring the impact of wage-price controls: A critical appraisal," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 2(1), pages 7-64, January.
- Perloff, Jeffrey M. & Wachter, Michael L., 1979. "A production function--nonaccelerating inflation approach to potential output : Is measured potential output too high?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 10(1), pages 113-163, January.
- Jon Frye & Robert J. Gordon, 1980. "The Variance and Acceleration of Inflation in the 1970s: Alternative Explanatory Models and Methods," NBER Working Papers 0551, National Bureau of Economic Research, Inc.
- Lemos, Sara, 2004.
"The Effect of the Minimum Wage on Prices in Brazil,"
IZA Discussion Papers
1071, Institute for the Study of Labor (IZA).
- Sara Lemos, 2004. "The Effect of the Minimum Wage on Prices in Brazil," Discussion Papers in Economics 04/6, Department of Economics, University of Leicester.
- Sara Lemos, 2004. "The Effects of the Minimum Wage on Prices in Brazil," Labor and Demography 0403011, EconWPA.
- Sara lemos, 2004.
"The Effect of the Minimum Wage on Prices,"
Discussion Papers in Economics
04/7, Department of Economics, University of Leicester.
- Robert J. Gordon, 1982.
"Why U.S. Wage and Employment Behavior Differs from That in Britain and Japan,"
NBER Working Papers
0809, National Bureau of Economic Research, Inc.
- Gordon, Robert J, 1982. "Why U.S. Wage and Employment Behaviour Differs from That in Britain and Japan," Economic Journal, Royal Economic Society, vol. 92(365), pages 13-44, March.
- Nguyen, Cuong, 2011. "Do Minimum Wage Increases Cause Inflation? Evidence from Vietnam," MPRA Paper 36750, University Library of Munich, Germany.
- Robert J. Gordon, 1983.
"Price Inertia and Policy Ineffectiveness in the United States, 1890-1980,"
NBER Working Papers
0744, National Bureau of Economic Research, Inc.
- Gordon, Robert J, 1982. "Price Inertia and Policy Ineffectiveness in the United States, 1890-1980," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1087-1117, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.