Toward Empirical Tests of Alternative Theories of Stagflation

by

James Devine

Econ. Dept./Loyola Marymount University

Los Angeles, CA 90046-8410

jdevine@lmu.edu

http://bellarmine.lmu.edu/~JDevine

click here for the main paper.

1. Two theories contrasted:

[1-N]

p = -b (U - N) + shock + l pe

The "triangle model" NRH Phillips Curve.

Under the canonical NRH assumptions (l = 1 and shock = 0), equilibrium with p = pe is a vertical long-run PC at U = N (the equilibrium U rate, the NAIRU). Further, in the hard-core NRH literature, N is unique, independent of U, and equal to the structural-frictional unemployment rate, USF.

[1-C]

p = a - b (U - USF) + shock + l pH

the "conflict theory" Phillips Curve.

[2-C]

a = a R + a W

excessive claims on the product

where pH is "hangover inflation" (including pe), and a R is capital's and a W labor's excessive claim on the total product. Following Brenner's research, assume that workers' aspirations were either constant or falling during the period after 1950 or so (a W is constant). So, under the profit-driven theory:

[3-C]

a = g (rT - r*); g (0) = 0; g ' > 0

r* is the full-capacity profit rate.

Making the canonical NRH assumptions:

[4-C]

p = a - b (U - USF) + pH

conflict PC w/ canonical NRH assumptions.

If we now allow for partial-adjustment determination of pH, this in turn implies inflationary acceleration even at U = USF. Thus the equilibrium unemployment rate the NAIRU equals:

[5-C]

N = USF + UB

two types of U at the NAIRU.

where UB is bargaining-power unemployment, equal to

[6-C]

UB = a /b = g (rT - r*)/b

the reserve army

Dropping the canonical NRH assumptions,

[7-C]

p = g (rT - r*) - b (U - USF) + shock + l pH

the full model, where the PC shifts outward if the rate of profit falls.

 

= - b (U - USF - UB) + shock + l pH

2. Measuring stagflation:

We can define the "stagflation potential factor" (SPF) as:

[8-C]

p + b U = -b (USF + UB) + shock + l pH

the RHS is possible causes of stagflation.

where I usually assume that b = 1, so that the SPF equals the "misery index." In the regressions, rT is also assumed constant. So they involve comparing p + U and r*, typically measured as r/cu.

Table 1: Different SPFs versus NFCB r*, 1960-98

Stagflation Potential Factor based on:

CPI-U

core CPI-U

CPI-U-X1

GDP price

C deflator

Constant

6.2578

6.2594

6.1359

5.6734

6.0735

Std Err of Y Est

0.1922

0.1787

0.1788

0.2053

0.1903

adj. R-Squared

0.6419

0.6743

0.6625

0.5370

0.6291

ln(r*) coefficient

-1.6789

-1.6756

-1.6338

-1.4480

-1.6180

t-stat

-8.3135

-8.9252

-8.6950

-6.7135

-8.0897

(a)

(b)

(c)

(d)

(e)

Note: Regressions use annual data and are log-linear. Each had 37 d.f.

Table 2: SPFs versus NFCB r* and time, 1960-98

Stagflation Potential Factor based on:

CPI-U

core CPI-U

CPI-U-X1

GDP price

C deflator

Constant

7.4545

7.1808

7.1753

7.0744

7.4051

Std Err of Y Est

0.1670

0.1638

0.1590

0.1718

0.1574

adj. R-Squared

0.7295

0.7261

0.7333

0.6757

0.7463

Time coefficient

-0.0103

-0.0079

-0.0090

-0.0121

-0.0115

t-stat

-3.6037

-2.8285

-3.2881

-4.1017

-4.2546

ln(r*) coefficient

-2.1030

-2.0022

-2.0022

-1.9445

-2.0900

t-stat

-9.9518

-9.6589

-9.9540

-8.9467

-10.4940

(a)

(b)

(c)

(d)

(e)

Note: Regressions use annual data and are log-linear. Each had 36 d.f.

Table 3: SPFs vs. NFCB r*, time, and 1986-98 dummy

Stagflation Potential Factor based on:

CPI-U

core CPI-U

CPI-U-X1

GDP price

C deflator

Constant

6.3788

6.1770

6.1479

5.9439

6.4245

Std Err of Y Est

0.1220

0.1248

0.1157

0.1229

0.1183

adj. R-squared

0.8557

0.8410

0.8586

0.8341

0.8566

Time coefficient

0.0077

0.0089

0.0083

0.0069

0.0050

t-stat

2.0368

2.2911

2.2981

1.8020

1.3496

Dummy coefficient

-0.4448

-0.4150

-0.4248

-0.4674

-0.4054

t-stat

-5.7010

-5.1986

-5.7379

-5.9485

-5.3558

ln(r*) coefficient

-1.7295

-1.6536

-1.6455

-1.5520

-1.7495

t-stat

-10.3156

-9.6384

-10.3431

-9.1903

-10.7545

(a)

(b)

(c)

(d)

(e)

Note: Regressions use annual data and are log-linear. Each had 35 d.f.

Table 4: Duménil and Lévy data. 1948-97

The t-statistics on Misery Index using various sectors and definitions.

dependent variable: log of the misery index; independent: log of r*

measure of the profit rate

sector

grossest measure of the profit rate

Before-Tax profit rate, not including interest

Before-Tax profit rate, including interest

gross Before-Tax profit rate

gross Before-Tax profit rate, including interest

After-Tax profit rate, not including interest

average

t-stat, excluding [6]

NFCB

-6.476

-4.358

-3.676

-5.224

-4.392

-2.927

-4.825

Total Business

-6.554

-4.575

-4.621

-5.145

-5.265

n.a.

-5.232

average t-stat

-6.515

-4.467

-4.148

-5.185

-4.829

-2.927

-5.029

[1]

[2]

[3]

[4]

[5]

[6]

[7]

49 degrees of freedom.

Table 5: Liebling data, 1948-77

The t-statistics on Misery Index using various methods of cyclical correction.

dependent variable: log of the misery index; independent: log of rate of return.

Method of Cyclical Correction of Rate of Return.

Type of NFCB Rate of Return.

actual (uncorrected)

CEA gap

STL gap

P-W gap

"trend" gap

Devine correction (r/cu)

Devine2 correction

average t-stat

Before-tax without Interest

-6.769

-4.719

-5.359

-6.813

-5.977

-6.537

-5.300

-5.925

Before-tax including Interest

-5.265

-3.322

-4.125

-5.900

-4.703

-5.076

-4.102

-4.642

After-tax without Interest

-5.382

-3.868

-4.375

-5.220

-5.009

-5.031

-4.235

-4.732

After-tax including Interest

-2.365

-1.089

-1.302

-2.854

-2.154

-1.888

-1.516

-1.881

average t-stat

-4.337

-2.760

-3.267

-4.658

-3.955

-3.998

-3.284

-3.751

[1]

[2]

[3]

[4]

[5]

[6]

[7]

[8]

29 degrees of freedom, except for those using the P-W gap, which had 23 d.f.