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What caused the great inflation moderation in the US? A post-Keynesian view

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  • Nathan Perry

    (Department of Business, Colorado Mesa University, Grand Junction, CO, USA)

  • Nathaniel Cline

    (Department of Economics, University of Redlands, CA, USA)

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 (i) wage declines and (ii) 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. 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, 2016. "What caused the great inflation moderation in the US? A post-Keynesian view," Review of Keynesian Economics, Edward Elgar Publishing, vol. 4(4), pages 475-502, October.
    • Handle: RePEc:elg:rokejn:v:4:y:2016:i:4:p475-502
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    More about this item

    Keywords

    inflation; Taylor rule;

    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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