Inflation is always and everywhere Not Conflict | 국외연구자료

KDI 경제교육·정보센터

Economic Information and Education Center

한국관련자료

Inflation is always and everywhere Not Conflict

CEPR

2024.06.24

According to Lorenzoni and Werning (2023a), “Conflict is the most general and proximate cause of inflation”. I show that this view involves both theoretical and conceptual shortcomings. My critique is based on two main arguments. Firstly, equilibrium conflict inflation is indeterminate, and thus does not provide a well-defined theory of inflation. The primary reason for the indeterminacy is that it is a theory based on relative prices and not on the price level. Secondly, I argue that in almost all models, inflation is determined by monetary and/or fiscal policy. Conflict, on the other hand, plays no role in determining the steady-state inflation rate, in contrast to the claim in Lorenzoni and Werning (2023a). Similarly to the New Keynesian Phillips Curve, it merely describes a relationship between output and inflation without determining either of them. To support my arguments, I use four standard frameworks for price-level determination: The New Keynesian model in which monetary policy sets the nominal interest rate, a money-in-utility model in which the central bank sets the money supply, the Lagos and Wright (2005) model and the Demand Theory of the Price Level (Hagedorn, 2016).

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