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Conflict inflation: an open economy approach

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  • Leonardo Vera

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.

Suggested Citation

  • Leonardo Vera, 2010. "Conflict inflation: an open economy approach," Journal of Economic Studies, Emerald Group Publishing, vol. 37(6), pages 597-615, November.
  • Handle: RePEc:eme:jespps:v:37:y:2010:i:6:p:597-615
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    References listed on IDEAS

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    Cited by:

    1. Marie, Jonathan, 2014. "Hyperinflation argentine de 1989 : une interprétation post-keynésienne," Revue de la Régulation - Capitalisme, institutions, pouvoirs, Association Recherche et Régulation, vol. 15.
    2. Cimoli, Mario & Lima, Gilberto Tadeu & Porcile, Gabriel, 2016. "The production structure, exchange rate preferences and the short-run—Medium-run macrodynamics," Structural Change and Economic Dynamics, Elsevier, vol. 37(C), pages 13-26.
    3. Eduardo F. Bastian & Mark Setterfield, 2017. "Nominal exchange rate shocks and inflation in an open economy: towards a structuralist inflation targeting agenda," Working Papers 1720, New School for Social Research, Department of Economics.

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