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t of cost push inflation but are highly focused on supply shocks as an explanation of almost everything you know oil as a supply shock causing inflation in the 1970s but tsk tsk don t call it cost push inflation and yet item 2 in the triangle model description above says cost push or supply shocks as if these are two different names for the same phenomenon note that in item 1 demand pull and short term phillips curve inflation are clearly offered as two different names for the same phenomenon there s more on gordon s triangle elsewhere in the final econ paper 2 3 keynesian view keynesian economic theory proposes that changes in money supply do not directly affect prices and that visible inflation is the result of pressures in the economy expressing themselves in prices the supply of money is a major but not the only cause of inflation there are three major types of inflation as part of what robert j gordon calls the triangle model demand pull inflation is caused by increases in aggregate demand due to increased private and government spending etc demand inflation is constructive to a faster rate of economic growth since the excess demand and favourable market conditions will stimulate investment and expansion cost push inflation also called supply shock inflation is caused by a drop in aggregate supply potential output this may be due to natural disasters or increased prices of inputs for example a sudden decrease in the supply of oil leading to increased oil prices can cause cost push inflation producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices built in inflation is induced by adaptive expectations and is often linked to the price wage spiral it involves workers trying to keep their wages up with prices above the rate of inflation and firms passing these higher labor costs on to their customers as higher prices leading to a vicious circle built in inflation reflects events in the past and so might be seen as hangover inflation demand pull theory states that the rate of inflation accelerates whenever aggregate demand is increased beyond the ability of the economy to produce its potential output hence any factor that increases aggregate demand can cause inflation however in the long run aggregate demand can be held above productive capacity only by increasing the quantity of money in circulation faster than the real growth rate of the economy another although much less common cause can be a rapid decline in the demand for money as happened in europe during the black death that s not quite word for word from wikipedia at ideas a consistent characterization of a near century of price behavior by robert j gordon 1980 from the abstract this paper develops a single econometric equation that can explain most of the variation in the aggregate u s rate of inflation during the period between 1892 and 1978 no shit and this the formation of price expectations changed completely after 1950 from regressive expectations appropriate under a gold standard to extrapolative inertia dominated expectations appropriate under a fiat money standard and postwar long period wage contracts interesting and it sounds right it has occurred to me that when prices were tied to gold there wasn t much that could be done to boost the quantity of money but when money s connection to gold became tenuous it became possible to increase the q of m so i think we should expect to see the thing that robert gordon points out here related from the text the epc expectational phillips curve explanation which in its most general form relates price change to expected inflation and the level of detrended output obscures the fact that price change has been much more closely related to the contemporaneous rate of change of detrended output and while the formation of inflation expectations has shifted in the postwar years the cyclical impact of detrended output changes has not and on page 4 under a gold standard we might find the price level jumping up and down around a stable or slowly moving trend but under the postwar fiat money standard few increases in the price level have been reversed here s a place to start over the near century of annual data studied here a change in output has shown a remarkably consistent tendency to be associated in annual data with a simultaneous change in the price level of about one half as much stated another way nominal gnp changes have been divided consistently with two thirds taking the form of output change and the remaining one third the form of price change if true that s a pretty interesting rule of thumb could be as useful as okun s law but i ve heard of okun s and i haven t heard of gordon s law so maybe gordon s law didn t hold up i guess i ll take a look at the data yeah but not today at november 14 2019 no comments email this blogthis share to x share to facebook share to pinterest tuesday november 12 2019 m a final econ the whole 800 years leading up to 1820 from section 2 4 history of balance of payments issues in m a final economics by sehba hussain edited by professor shakoor khan from about the 16th century mercantilism was a prevalent theory influencing european rulers who sometimes strove to have their countries out sell competitors and so build up a war chest of gold this era saw low levels of economic growth average global per capita income is not considered to have significantly risen in the whole 800 years leading up to 1820 and is estimated to have increased on average by less than 0 1 per year between 1700 1820 first impression i like that last sentence so rich with stats second thought i wonder if this is original writing or borrowed borrowed at november 12 2019 no comments email this blogthis share to x share to facebook share to pinterest sunday november 10 2019 m a final economics at studyres com in the if by deliberate policy search i did the other day something that looked interesting turned up m a final economics at studyres com i poked around a little finding enough that i wanted to come back for a more thorough look i found something on robert j gordon and his triangle model of inflation i heard of that 20 years ago or more and had in the back of my mind ever since never went looking for it but now here it was quite by accident so i made a note and kept the link to the m a final economics page handy planning to get to it some time in the next 20 years maybe then i came across the names samuelson and solow together like that a reference to their 1960 article that i ve been on about lately so i added to my note i don t know what this page is but it might be interesting while i was there i read the first sentence of the s s part 2 7 samuelson and solow s approach as this model says it is not possible on the basis of a priori reasoning to reject either the demand pull or cost push hypothesis or the variants of the latter such as demand shift ah the good stuff it struck me as a paraphrase at first but i remembered the words a priori reasoning and i remember s s not rejecting either the demand pull or cost push hypothesis or the variants seemed like a lot of identical words for one sentence sort of a relaxed paraphrase or maybe a plagiaphrase couldn t say for sure but i had to go back to my i don t know what this is note and double underline it that was two or three days ago i m back to it now to see what i saw i compared the m a final econ article to the samuelson and solow article that i recently extracted from the joint economic committee report and put on the blog the two are not identical after all i ve taken a few paragraphs of each and highlighted the differences i made the paragraph breaks the same for both to make reading and comparison easier the original paper from 1960 on the left the m a final econ paper on the right iv 2 7 samuelson and solow s approach we have concluded that it is not possible on the basis of a priori reasoning to reject either the demand pull or cost push hypothesis or the variants of the latter such as demand shift we have also argued that the empirical identifications needed to distinguish between these hypotheses may be quite impossible from the experience of macrodata that is available to us and that while use of microdata might throw additional light on the problem even here identification is fraught with difficulties and ambiguities nevertheless there is one area where policy interest and the desire for scientific understanding for its own sake come together if by deliberate policy one engineered a sizable reduction of demand or refused to permit the increase in demand that would be needed to preserve high employment one would have an experiment that could hope to distinguish between the validity of the demand pull and the cost push theory as we would operationally reformulate those theories if a small relaxation of demand were followed by great moderations in the march of wages and other costs so that the social cost of a stable price index turned out to be very small in terms of sacrificed high level employment and output then the demand pull hypothesis would have received its most important confirmation on the other hand if mild demand repression checked cost and price increases not at all or only mildly so that considerable unemployment would have to be engineered before the price level updrift could be prevented then the cost push hypothesis would have received its most important confirmation if the outcome of this experience turned out to be in between these extreme cases as we ourselves would rather expect then an element of validity would have to be conceded to both views and dull as it is to have to embrace eclectic theories scholars who wished to be realistic would have to steel themselves to doing so of course we have been talking glibly of a vast experiment actually such an operation would be fraught with implications for social welfare naturally since they are confident that it would be a success the believers in demand pull ought to welcome such an experiment but equally naturally the believers in cost push would be dead set against such an engineered low pressure economy since they are equally convinced that it will be a dismal failure involving much needless social pain as this model says it is not possible on the basis of a priori reasoning to reject either the demand pull or cost push hypothesis or the variants of the latter such as demand shift ute have also argued that the empirical identifications needed to distinguish between these hypotheses may be quite impossible from the experience of macro data that is available to us and that while use of microdot might throw additional light on the problem even here identification is fraught with difficulties and ambiguities nevertheless there is one area where policy interest and the desire for scientific understanding for its own sake come together if by deliberate policy one engineered a sizable reduction of demand or refused to permit the increase in demand that would be needed to preserve high employment one would have an experiment that could hope to distinguish between the validity of the demand pull and the cost push theory as we would operationally reformulate those theories if a small relaxation of demand were followed by great moderations in the march of wages and other costs so that the social cost of a stable price index turned out to be very small in terms of sacrificed high level employment and output then the demand pull hypothesis would have received its most important confirmation on the other hand if mild demand repression checked cost and price increases not at all or only mildly so that considerable unemployment would have to be engineered before the price level up drift could be prevented then the cost push hypothesis would have received its most important confirmation if the outcome of this experience turned out to be in between these extreme cases as we ourselves would rather expect then an element of validity would have to be conceded to both views and dull as it is to have to embrace eclectic theories scholars who wished to be realistic would have to steel themselves to doing so of course we have been talking glibly of a vast experiment actually such an operation would be fraught with implications for in demand pull ought to welcome such an experiment but equally naturally the believers in cost push would be dead set against such an engineered low pressure economy since they are equally convinced that it will be a dismal failure involving much needless social pain okay to tie this all together i want to point out that samuelson and solow said it is not possible on the basis of a priori reasoning to reject either the demand pull or cost push hypothesis and the m a final econ paper says it and i say it and maybe you also i dunno but paul volcker most definitely did not say it gone was the notion of cost push versus demand pull volcker implicitly accepted that rising inflation was caused by demand pull at november 10 2019 no comments email this blogthis share to x share to facebook share to pinterest labels s s 1960 friday november 8 2019 a key quote from samuelson and solow 1960 the full thought from section iv of samuelson and solow 1960 if by deliberate policy one engineered a sizable reduction of demand or refused to permit the increase in demand that would be needed to preserve high employment one would have an experiment that could hope to distinguish between the validity of the demand pull and the cost push theory as we would operationally reformulate those theories i have to go back and check what they mean by as we would operationally reformulate those theories but paul volcker performed that experiment as chairman of the federal reserve marcus nunes writes on becoming chairman of the fed volker challenged the keynesian orthodoxy which held that the high unemployment high inflation combination of the 1970 s demonstrated that inflation arose from cost push and supply shocks a situation dubbed stagflation to volker the policy adopted by the fomc rests on a simple premise documented by centuries of experience that the inflation process is ultimately related to excessive growth in money and credit this view an overhaul of fed doctrine implicitly accepts that rising inflation is caused by demand pull or excess aggregate demand or nominal spending josh hendrickson concurs relying on public statements and personal diary entries from arthur burns i demonstrate that there is little evidence that the federal reserve was less concerned with inflation during the 1970s rather the view of burns and others was that inflation was largely a cost push phenomenon burns thought that incomes policies were necessary to restore price stability and stated that monetary and fiscal tools are inadequate for dealing with sources of price inflation that are plaguing us now the shift in policy beginning with paul volcker was an explicit...
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