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

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.