Wages, Exchange Rates, and the Great Inflation Moderation: A Post-Keynesian View

Levy Economics Institute, Working Papers Series No. 759

29 Pages Posted: 21 Mar 2013

See all articles by Nathan Perry

Nathan Perry

Colorado Mesa University

Nathaniel Cline

University of Redlands

Date Written: March 20, 2013

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 (1) wage declines and (2) 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,” brought about by declining union membership and international competition. Exchange rate effects have lowered inflation through cheaper import and oil prices, and have indirectly affected wages through strong dollar policy, which has lowered manufacturing wages due to increased competition. 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.

Keywords: Inflation, Taylor Rule, Post-Keynesian, Structuralist

JEL Classification: E12, E31

Suggested Citation

Perry, Nathan and Cline, Nathaniel, Wages, Exchange Rates, and the Great Inflation Moderation: A Post-Keynesian View (March 20, 2013). Levy Economics Institute, Working Papers Series No. 759, Available at SSRN: https://ssrn.com/abstract=2236208 or http://dx.doi.org/10.2139/ssrn.2236208

Nathan Perry (Contact Author)

Colorado Mesa University

1100 North Ave
Grand Junction, CO 81501
United States

Nathaniel Cline

University of Redlands ( email )

1200 East Colton Ave
Redlands, CA 92373-0999
United States

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