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41. Is “Inflation First” Really “Rentiers First”? The Taylor Rule and Rentier Income in Industrialized Countries

Author:
Mario Seccareccia and Guillermo Matamoros Romero
Publication Date:
07-2023
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The Taylor rule has returned as a significant policy guide amid increasingly overt political pressures for its official (and not just its implicit) adoption at the US Fed as inflation fears have come to dominate monetary policy actions both in the US and internationally in recent times. Our paper analyzes the effect of monetary policy on the functional distribution of income by reconstructing how the post-1970s “inflation first” policy commitments of central banks came to be crystallized in the Taylor rule. While there are differences among the various specifications of this “rule”, the Taylor relation is merely an offshoot of what can be described generically as the family of Wicksellian reaction functions whose implications support rentier income over time. Because of the internal logic of the Taylor rule, this has led to different interpretations such as, for example, the more Keynesian Yellen rule, which depart from the strict sense of the Taylor rule. The paper also interprets the Taylor Rule in light of Wicksell’s formulation and analyzes the potential consequence of the differences. In contrast to the strict Wicksell rule of “proportional” adjustment, our econometric findings suggest evidence that central banks adjust “over-proportionally” the benchmark money interest rate in the presence of changes in the inflation rate for the complete “inflation first” era since the 1970s until the COVID-19 crisis. They thereby strongly favored rentier incomes in their reaction functions, with the possible exception of the post-financial crisis period. To limit the pro-rentier consequences of such inflation-targeting regimes, it is important that policymakers mandate multiple objectives for central banks, as exemplified in the current US Fed’s dual mandate.
Topic:
Economics, Inflation, Industrialization, and Rentierism
Political Geography:
North America and United States of America

42. Why The Monetary Policy Framework in Advanced Countries Needs Fundamental Reform

Author:
William White
Publication Date:
08-2023
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The objective pursued by most central banks in recent decades has been a low level of inflation. Since inflation was believed to respond to changes in unemployment, this implied a primary focus on labor markets and output gaps in the “real” economy when setting monetary policy. In contrast, “financial” sector developments were thought to be of no great importance.
Topic:
Economics, Monetary Policy, Reform, Inflation, and Labor Market
Political Geography:
Global Focus

43. The Art of Paradigm Maintenance: How the ‘Science of Monetary Policy’ tries to deal with the inflation of 2021-2023

Author:
Servaas Storm
Publication Date:
10-2023
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The macroeconomic models used by major institutions including the Federal Reserve and the International Monetary Fund (IMF) failed to predict the inflation surge during 2021-2023. The output gap, the unemployment gap, the New Keynesian Phillips curve and inflation expectations did not give timely and relevant signals. The re-emergence of inflation thus threw the ‘science of monetary policy’ off the rails. Faced with the choice between changing their paradigm and proving that there is no need to do so, the ‘scientists of monetary policy’ got busy on the proof. As a result, a number of ad-hoc epicycles have been added to the New Keynesian analytical core—with the help of which one can claim to be able to explain the sudden acceleration of inflation post-factum. This paper critically reviews the theoretical and empirical merits of three recent tweaks to the New Keynesian core: using the vacancy ratio as the appropriate measure of real economic activity; hammering on the considerable risk of an imminent wage-price spiral; and the resurrection of the non-linear Phillips curve. The paper concludes by drawing out sobering lessons concerning the art of paradigm maintenance as practiced by the ‘scientists of monetary policy’.
Topic:
Economics, Monetary Policy, Institutions, Inflation, and Macroeconomics
Political Geography:
Global Focus

44. Energy, Inflation and Market Power: Excess Pass-Through in France

Author:
Axelle Arquie and Malte Thie
Publication Date:
10-2023
Content Type:
Working Paper
Institution:
Centre d'Etudes Prospectives et d'Informations Internationales (CEPII)
Abstract:
We explore how, in the French manufacturing sector, producer prices vary with market power during a severe episode of energy price hikes (between January 2020 and December 2022). Our work provides micro-level empirical evidence in favor of a role for firms' market power in explaining inflation. Using a rich dataset on French manufacturing firms' balance sheets, we first estimate markups at the firm-level, and aggregate them at the sectoral level. We then study the response of the producer price index (PPI) to a change in spot energy prices, depending on average market power within sectors. We show that in sectors with higher markups, prices increase relatively more: in the least competitive sector, firms pass through over 115% of the energy shock, implying an excess pass-through of more than 15 percentage points. In addition, we analyze in greater detail the mechanisms that might be behind our results: we discard the possibility that the pricing behavior might be driven by a "liquidity buffer rationale", implying that the excess pass-through we identify is detrimental to consumers.
Topic:
Markets, Inflation, Manufacturing, Energy, and Markups
Political Geography:
Europe and France

45. Inflation in the Time of Corona and War

Author:
Servaas Storm
Publication Date:
06-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Reliance on established macroeconomic thinking is not of much use in trying to understand what to do in response to the constellation of forces driving up inflation in these times of COVID-19 and war. This paper attempts to reduce the heat and turn up the light in the debate on the return of high inflation and looming stagflation—by providing evidence-based answers to the main (policy) questions concerning the return of high inflation: is the increased inflation due to (global) supply and/or demand factors? Is the inflation in the US exceptional or are other OECD and emerging economies experiencing similar inflationary pressures? Is the increase in inflation permanent or transitory? Can the Fed safely bring down inflation? Is fiscal policy the underlying cause of inflation? Are there alternative, less socially costly, ways to bring inflation down? And what will happen to inflation in the longer run, when the US and other economies will face the impacts of global warming?
Topic:
Economics, War, Inflation, and COVID-19
Political Geography:
Global Focus

46. Inflation in the Time of Corona and War: The Plight of the Developing Economies

Author:
Servaas Storm
Publication Date:
11-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Reliance on established macroeconomic thinking is not of much use in trying to understand what to do in response to the constellation of forces driving up inflation and slowing down growth in these times of COVID-19 and war. This paper attempts to reduce the heat and turn up the light in the debate on the return of high inflation and looming stagflation—by providing evidence-based answers to key (policy) questions concerning the return of high inflation: How close are the parallels between the current conjuncture and the 1970s? What are the differences? Does what is currently happening already amount to stagflation? Can central bankers engineer a ‘soft landing’ of their economies or are we already poised for a deep (global) recession? What are the likely spill- over effects of monetary tightening in the US on the emerging economies? What, if anything, can we learn from the monetary and fiscal policy experiences and policy mistakes of the 1970s? And, finally, are there alternative, less socially costly, ways to bring inflation down?
Topic:
Economics, War, Conflict, Inflation, Pandemic, and COVID-19
Political Geography:
Global Focus

47. A Rotten Money Regime is Responsible for Pandemic and War Inflation

Author:
Brendan Brown
Publication Date:
10-2022
Content Type:
Special Report
Institution:
Hudson Institute
Abstract:
Who is responsible for the Great Pandemic and War Inflation of 2021–22? Is it Federal Reserve Chair Jay Powell, former President Donald Trump, President Joe Biden, or President Vladimir Putin? The answer is that the buck stops at a rotten monetary regime—the so-called “2-percent-inflation standard.” Trying to blame particular individuals may help those who gain from the present monetary status quo. Yet blaming them absolves the monetary regime, which is trampling upon the green shoots whose growth is essential for the renaissance of competitive free-market capitalism. If the United States had a good money regime when first the pandemic and then the Russian war struck the economy, the great monetary inflation that these shocks spawned would not have occurred. The current money regime might well have done better with more capable leadership and good luck—but the regime’s deep flaws prevented the possibility of an overall good outcome. Furthermore, even if the pandemic and war had not struck, the bad money regime was producing bad outcomes—including economic sclerosis with sluggish growth rates for productivity and living standards while advancing monopoly capitalism. These outcomes could well have gotten a lot worse.. This policy memo focuses on the shocks of the pandemic and war rather than what could have happened without them. However, it does venture into the counterfactual of how a good money regime would have responded to those shocks, while helping demonstrate what has gone wrong. Demonstrating the links between the rottenness of the monetary system and the high inflation during the pandemic and Russian war requires sharing with the reader a preview of the differences between good and bad money regimes. A broader analysis of these should follow in subsequent policy memos
Topic:
Economics, Inflation, Fiscal Policy, and COVID-19
Political Geography:
North America and United States of America

48. The return of inflation: Can we protect real incomes?

Author:
Manos Matsaganis and Sotiria Theodoropoulou
Publication Date:
11-2022
Content Type:
Working Paper
Institution:
Hellenic Foundation for European and Foreign Policy (ELIAMEP)
Abstract:
High inflation, virtually unknown in advanced economies since the 1980s, has made a comeback. In this policy paper, we first explain where inflation comes from, and describe how the policy context for dealing with it was shaped after Keynesian demand management proved unable to defeat stagflation. We then critically examine the various policy options. Generally speaking, policy makers may attempt to (i) contain inflation by raising interest rates or, more directly, by controlling prices, (ii) alleviate the impact of inflation on household budgets through price subsidies or income transfers, and (iii) protect workers’ real incomes via wage indexation and social pacts. We conclude by assessing the merits, costs, and distributional implications of each option in turn.
Topic:
Economy, Inflation, and Income
Political Geography:
Europe and Global Focus

49. Additional Losses: Examining the severity of the protests' impact on Iran's economy

Author:
FARAS
Publication Date:
12-2022
Content Type:
Policy Brief
Institution:
Future for Advanced Research and Studies (FARAS)
Abstract:
Widespread protests broke out across Iran after the death of Mahsa Amini in a hospital in Tehran in September 2022 while in the custody of the country's morality police. While the current protests differ from previous protests in that protestors demanded women's rights be respected. Later, the protests spread, and the protesters demanded regime change. Yet, the economy's deterioration is one of the main drivers of the spread of the angry protests. As social unrest is likely to further exacerbate across Iran, the protests are likely to incur financial and trade losses, further complicating the economic situation.
Topic:
Economy, Domestic Politics, Protests, Inflation, and Civil Unrest
Political Geography:
Iran and Middle East

50. Different Choices, Divergent Paths: Poland and Ukraine

Author:
Thorvaldur Gylfason, Eduard Hochreiter, and Tadeusz Kowalski
Publication Date:
12-2022
Content Type:
Special Report
Institution:
The Vienna Institute for International Economic Studies (WIIW)
Abstract:
We compare the economic growth trajectories of Poland and Ukraine since 1990 to try to understand the extent to which the observed growth differentials can be traced to increased efficiency in the use of capital and other factors (intensive growth), rather than to simple accumulation of capital (extensive growth). We stress the role of qualitative factors such as education, governance and institutions. We ask whether the EU perspective and NATO membership played a role. We discuss the closely related histories of the two countries and note the stark differences between them, including their different approaches to the EU vs Russia, full vs incomplete transition to a market economy, and democracy vs anocracy, as well as different initial conditions. We compare key determinants of growth and growth trajectories, using economic as well as social indicators, and trying to disentangle efficiency and accumulation and combine path dependence and the role and scope of creative destruction. While Poland had the shortest and mildest transformation recession among CEE countries, Ukraine has been stagnant, or in decline, since 1990. The statistics we report and the stories we tell suggest that both countries have a complex relationship with democracy and that the nearly threefold difference in per capita GDP at PPP in 2021 in Poland’s favour, with the ratio of investment to GDP similar in both countries, can most plausibly be traced to: (a) Poland’s more extensive and diversified exports, and fewer restrictions on trade, in addition to more comprehensive and quicker restructuring of the national economy inspired by the EU perspective; (b) Poland’s more extensive and better-quality education; (c) Poland’s greater democracy and longer experience of democracy, lower levels of corruption, better governance, and freer press; (d) Poland’s smaller agricultural sector and greater emphasis on manufacturing; and (e) Poland’s lower inflation and higher level of financial development. Furthermore, Poland built market-friendly institutions to EU specifications and joined NATO. Against all this, Ukraine had more economic equality and lower unemployment as well as, from the early 1990s, a lower initial level of income per person, but was hampered by political divisions, path-dependent corruption and poor governance. During the global Covid-19 pandemic, Ukraine apparently suffered fewer deaths than Poland, despite fewer vaccinations.
Topic:
Economics, Education, Governance, Reform, European Union, Economic Growth, Inflation, Exports, Transition, and Labor Market
Political Geography:
Europe, Ukraine, and Poland