2023 (20), №4

Revisiting Inflation Concepts: Orthodox Modifications and Heterodox Alternatives

For citation: 

Plushchevskaya, Y. L., & Smirnov, A. N. (2023). Revisiting Inflation Concepts: Orthodox Modifications and Heterodox Alternatives. AlterEconomics, 20(4), 751–776. https://doi.org/10.31063/AlterEconomics/2023.20-4.2

Abstract:

Amid rising global inflation, traditional monetary policies face challenges, prompting a reevaluation of their theoretical foundations and a surge in interest in alternative perspectives. This article examines recent alterations to conventional inflation concepts, questioning the extent of their significance and exploring the potential of heterodox theories as viable contenders. A literature review highlights that within mainstream economics, emphasis has been on the vitality of the Phillips curve, its accurate specification, and broader adjustments to analytical and forecasting frameworks. While models and techniques have grown more sophisticated, the core idea of inflation as a temporary deviation from long-run equilibrium due to exogenous demand shocks remains unchanged. In contrast, heterodox schools present fundamentally different approaches. Post Keynesianism attributes inflation to supply-side factors and distributional conflicts between workers and firms, with institutional features playing a significant role. Latin-American structuralism emphasizes imbalances in peripheral economies. Both theories develop mathematical models that incorporate production and institutional factors, allowing for a wide range of country-specific inflation trajectories. However, they seem to miss universal regularities to some extent. Evolutionary economics and the long-waves theory conceptualize price dyna­mics as manifestations of non-linear self-organization within a complex economic system, borrowing me­thods from the natural sciences. However, despite its obvious potential, this approach is still in the early phases of development. In summary, heterodox schools are in the process of formulating coherent inflation theories that could potentially replace the mainstream paradigm. If they can achieve theoretical and methodological compatibility, these schools may complement each other, providing a more robust foundation for understanding inflation dynamics.

PDF full
Downloaded: 37

Yulia L. Plushchevskaya — Cand. Sci. (Econ.), Leading Research Associate, Institute of Economics of the Russian Academy of Sciences; https://orcid.org/0009-0008-2073-8017 (32, Nakhimovsky Prospect, Moscow, 117218, Russian Federation; e-mail: pul@inecon.ru).

Artem N. Smirnov — Senior Analyst, Digital Industrial Platform (6, Vernadsky prospect, Moscow, 119334, Russian Federation; e-mail: ansmirnov@nes.ru).

Akaev, A. A. (2013). Bol’shie tsikly kon’yunktury i innovatsionno-tsiklicheskaya teoriya ekonomicheskogo razvitiya Shumpetera-Kondrat’eva [Long Waves of Conjuncture and Schumpeter-Kondratyev Innovation-Cyclical Theory of Economic Development]. Ekonomicheskaya nauka sovremennoy Rossii [Economics of Contemporary Russia], 2(61), 7–29. (In Russ.)

Amitrano, C. R., & Vasconcelos, L. (2019). Income Distribution, Inflation and Economic Growth: A Post-Keynesian Approach. Panoeconomicus, 66 (3), 277–306. https://doi.org/10.2298/PAN1903277A

Andreev, A. (2016). Prognozirovanie inflatsii metodom kombinirovaniya prognozov v Banke Rossii. Seriya dokladov ob ekonomicheskikh issledovaniyakh [Forecasting of inflation by combining forecasts in the Bank of Russia. A series of reports on economic research]. https://cbr.ru/Content/Document/File/16726/wps_14.pdf (Date of access: 23.08.2023).

Ang, A., Bekaert, G., & Wei, M. (2007). Do macro variables, asset markets, or surveys forecast inflation better? Journal of Monetary Economics, 54 (4), 1163–1212. https://doi.org/10.1016/j.jmoneco.2006.04.006

Bańbura, M., & Bobeica, E. (2023). Does the Phillips curve help to forecast euro area inflation? International Journal of Forecasting, 39 (1), 364–390. https://doi.org/10.1016/j.ijforecast.2021.12.001

Benes, J., Kumhof, M., & Laxton, D. (2014). Financial Crises in DSGE Models: A Prototype Model. https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Financial-Crises-in-DSGE-Models-A-Prototype-Model-41467 (Date of access: 23.08.2023)

Blanchard, O. J., & Gali, J. (2007). The Macroeconomic Effects of Oil Shocks: Why are the 2000s so different from the 1970s? NBER Working Paper, 13368. https://doi.org/10.3386/w13368

Bobrovnikov, A. V. (2004). Makrotsikly v ekonomike stran Latinskoy Ameriki [Macro-cycles in the Economy of Latin America’s Countries]. Moscow, Russia: Institute of Latin American Studies of the Russian Academy of Sciences. (In Russ.)

Borio, C. (2014). The financial cycle and macroeconomics: What have we learnt? Journal of Banking & Finance, 45 (1), 182–198. https://doi.org/10.1016/j.jbankfin.2013.07.031

Braga, J., & Summa, R. (2020). The (Conflict-Augmented) Phillips Curve Is Alive and Well. ASTRIL Working Paper, 55. https://doi.org/10.13140/RG.2.2.13709.59363

Bresser-Pereira, L. C. (2023). The Theory of Inertial Inflation: A Brief History. Revista de Economia Politica, 43 (2), 480–498. http://dx.doi.org/10.1590/0101-31572023-3433

Burlachkov, V. K. (2020). Denezhnaya teoriya i dinamicheskaya ekonomika: vyvody dlya Rossii [Monetary Theory and Dynamic Economics: Conclusions for Russia]. Moscow, Russia: LIBROKOM, 352. (In Russ.)

Clarida, R., Galí, J., & Gertler, M. (1999). The Science of Monetary Policy: A New Keynesian Perspective. Journal of Economic Literature, 37 (4), 1661–1707. http://dx.doi.org/10.1257/jel.37.4.1661

Coibion, O., Gorodnichenko, Y., & Kamdar, R. (2018). The Formation of Expectations, Inflation, and the Phillips Curve. Journal of Economic Literature, 56 (4), 1447–1491. https://doi.org/10.1257/jel.20171300

Coibion, O., Gorodnichenko, Y., & Ulate, M. (2019). Is inflation just around the corner? The Phillips curve and global inflationary pressures. AEA Papers and Proceedings, 109, 465–469. https://doi.org/10.1257/pandp.20191055

Del Negro, M., Giannoni, M. P., & Schorfheide, F. (2015). Inflation in the great recession and new Keynesian models. American Economic Journal: Macroeconomics, 7 (1), 168–196. https://doi.org/10.1257/mac.20140097

Diebold, F. X., & Shin, M. (2018). Machine learning for regularized survey forecast combination: Partially-egalitarian LASSO and its derivatives. International Journal of Forecasting, 35 (4), 1679–1691. https://doi.org/10.1016/j.ijforecast.2018.09.006

Edge, R. M., & Gürkaynak, R. S. (2011). How useful are estimated DSGE model forecasts? Finance and Economics Discussion Series, 2011 (11), 1–67 https://doi.org/10.17016/FEDS.2011.11

Faust, J., & Wright, J. H. (2007). Comparing Greenbook and reduced form forecasts using a large realtime dataset. Journal of Business and Economic Statistics, 27 (4), 468–479. https://doi.org/10.1198/jbes.2009.07214

Fernández-Huerga, E., Pardo, A., & Salvador, A. (2023). Compatibility and complementarity between institutional and post-Keynesian economics: a literature review with a particular focus on methodo­logy. Economia Politica, 40, 413–443. https://doi.org/10.1007/s40888-023-00299-7

Ffrench-Davis, R., & Torres, M. (2020). Neo-Structuralism. In Vernengo, M., Caldentey, E.P.,
Rosser Jr, B.J. (Eds.), The New Palgrave Dictionary of Economics. London: Palgrave Macmillan. https://doi.org/10.1057/978-1-349-95121-5_3122-1

Gallegati, M. (2016). Wavelet Estimation of Kondratieff Waves: An Application to Long Cycles in Prices and World GDP. Kondratieff Waves: Cycles, Crises, and Forecasts, 99–120. https://www.sociostudies.org/upload/sociostudies.org/almanac/k_waves_3/099-120.pdf (Date of access: 23.08.2023)

Gordon, R. J. (2013). The Phillips curve is alive and well: Inflation and the NAIRU during the slow recovery. National Bureau of Economic Research. Working Paper Series, 19390. https://doi.org/10.3386/w19390

Inoue, A., & Kilian, L. (2008). How useful is bagging in forecasting economic time series? A case study of US consumer price inflation. Journal of the American Statistical Association, 103 (482), 511–522. https://doi.org/10.1198/016214507000000473

Jørgensen, P. L., & Lansing, K. J. (2023). Anchored inflation expectations and the flatter Phillips curve. Federal Reserve Bank of San Francisco Working Paper 2019–27. https://doi.org/https://doi.org/10.24148/wp2019-27

Kar, S., Bashir, A., & Jain, M. (2021). New Approaches to Forecasting Growth and Inflation: Big Data and Machine Learning. IEG Working Paper, 446. https://iegindia.org/upload/publication/Workpap/wp446.pdf (Date of access: 23.08.2023)

Kiley, M. T. (2014). An evaluation of the inflationary pressure associated with short-and long-term unemployment. Finance and Economics Discussion Series, 2014 (28), 1–19. https://doi.org/10.17016/FEDS.2014.28

Kim, H. (2020). A missing element in the empirical post Keynesian theory of inflation—total credits to households: A first-differenced VAR approach to U.S. inflation. Journal of Post Keynesian Economics, 43 (4), 640–656. https://doi.org/10.1080/01603477.2019.1672559

King, M. (2012). Twenty years of inflation targeting, speech in London School of Economics. https://www.bis.org/review/r121010f.pdf (Date of access: 23.08.2023)

Kondratieff Waves. Annual almanac. https://www.socionauki.ru/almanac/k_waves_en/ (Date of access: 23.08.2023)

Kondratiev, N. D. (2002a). Bol’shie tsikly ekonomicheskoy kon’yunktury [Large cycles of economic conjuncture]. Bol’shie tsikly kon’yunktury i teoriya predvideniya. Izbrannye trudy [Large cycles of conjuncture and the theory of foreseeing. Selected works] (pp. 341–400). Moscow, Russia: Ekonomika. (In Russ.)

Kondratiev, N. D. (2002b). Dinamika tsen promyshlennykh i selskokhozyaystvennykh tovarov [Dynamics of Industrial and Agricultural Prices]. Bol’shie tsikly kon’yunktury i teoriya predvideniya. Izbrannye trudy [Large cycles of conjuncture and the theory of foreseeing. Selected works] (pp. 401–502). Moscow, Russia: Ekonomika. (In Russ.)

Lavoie, M. (2014). Post-Keynesian Economics: New Foundations. Cheltenham, UK; Northampton, MA, USA: Edward Elgar, 660.

Love, J. L. (2015a). Predislovie k russkomu perevodu [Preface to the Russian translation]. Istoki. Kachestvennye sdvigi v ekonomicheskoy real’nosti i ekonomicheskoy nauke [Origins: Qualitative changes in economic reality and economic science] (pp. 407–410). Moscow, Russia: HSE Publishing House. (In Russ.)

Love, J. L. (2015b). Pod’em i upadok ekonomicheskogo strukturalizma v Latinskoy Amerike: novye aspekty [The Rise and Decline of Economic Structuralism in Latin America: New Dimensions]. Istoki. Kachestvennye sdvigi v ekonomicheskoy real’nosti i ekonomicheskoy nauke [Origins: Qualitative changes in economic reality and economic science] (pp. 453–490). Moscow, Russia: HSE Publishing House. (In Russ.)

Lütkepohl, H. (2005). New introduction to multiple time series analysis. Berlin: Springer Science & Business Media, 764. https://doi.org/10.1007/978-3-540-27752-1

Maevsky, V. I., Malkov, S. Yu., Rubinstein, A. A., & Krasil’nikova, E. V. (2020). Teoriya vosproizvodstva kapitala i ne-neytral’nost’ deneg [The theory of capital reproduction and the non-neutrality of money]. Moscow, St. Petersburg, Russia: Nestor-Istoriya, 160. (In Russ.)

Maevsky, V. I. (1999). Evolyutsionnaya teoriya i neravnovesnye protsessy (na primere ekonomiki SShA) [Evolutionary theory and nonequilibrium processes (using the example of the US economy).]. Ekonomicheskaya nauka sovremennoy Rossii [Economics of Contemporary Russia], 4, 45- 62. (In Russ.)

Masini, R. P., Medeiros, M. C., & Mendes, E. F. (2021). Machine learning advances for time series forecasting. Journal of economic surveys, 37 (1), 76–111. https://doi.org/10.1111/joes.12429

Medeiros, M. C., Vasconcelos, G. F., Veiga, A., & Zilberman, E. (2019). Forecasting inflation in a data-rich environment: the benefits of machine learning methods. Journal of Business and Economic Statistics, 39 (1), 98–119. https://doi.org/10.1080/07350015.2019.1637745

Missio, F., Jayme, F. G., & Oreiro, J. L. (2015). The Structuralist Tradition in Economics: Methodological and Macroeconomics Aspects. Brazilian Journal of Political Economy, 35 (2), 247–266. https://doi.org/10.1590/0101-31572015v35n02a03

Nelson, R. R., & Winter, S. G. (2002). Evolyutsionnaya teoriya ekonomicheskikh izmeneniy [An Evolutionary Theory of Economic Change]. Moscow, Russia: Delo Publ., 536. (In Russ.)

Orekhovsky, P. A. (2016). Preryvistyy trend razvitiya strukturalizma: al’ternativnaya traditsiya ekonomicheskogo analiza [The Discontinuous development trend of structuralism: alternative tradition of economic analysis]. Mosсow: Institute of Economics of RAS. http://inecon.org/docs/2016/Orekhovsky_paper_20161027.pdf (Date of access: 23.08.2023) (In Russ.)

Protasov, A. Yu. (2013). Sistemnye tsikly nakopleniya Dzh. Arrigi, i dlinnye volny inflatsii [System Accumulation Сycles of G. Arrighi and Long Waves of Inflation]. Vestnik Sankt-Peterburgskogo universiteta. Ekonomika [St Petersburg University Journal of Economic Studies], 5 (3), 3–24. (In Russ.)

Ratner, D., Sim, J. W. (2020). Who Killed the Phillips Curve? A Murder Mystery. https://doi.org/10.13140/RG.2.2.26370.43209

Rozmainsky, I. V. (2010). Vvedenie v postkeynsianstvo [Introduction to Post-Keynesianism]. Idei i ideally [Ideas and Ideals], 1 (1(3)), 88–105. (In Russ.)

Rozmainsky, I. V. (2016). Postkeynsiantsy i Duglas Nort o neopredelennosti i institutakh: propushchennaya svyaz’? [The Post Keynesians and Douglas North About Uncertainty and Institutions: The Missing Link?]. Journal of Institutional Studies, 8 (3), 35–46. https://doi.org/10.17835/2076-6297.2016.8.3.035-046 (In Russ.)

Smets, F., & Wouters, R. (2003). An estimated dynamic stochastic general equilibrium model of the euro area. Journal of the European economic association, 1 (5), 1123–1175. https://doi.org/10.1162/154247603770383415

Staiger, D., Stock, J. H., & Watson, M. W. (2001). Prices, wages and the U.S. NAIRU in the 1990s. NBER Working Paper, 8320. https://doi.org/10.3386/w8320

Stock, J. H., & Watson, M. W. (2007). Why has U.S. inflation become harder to forecast? Journal of Money, Credit and banking, 39 (1), 3–33. https://doi.org/10.1111/j.1538-4616.2007.00014.x

Taylor, L. (1991). Income Distribution, Inflation, and Growth: Lectures on Structuralist Macroeconomic Theory. The MIT Press.

Van Ees, H., & Garretsen, H. (1996). Endogenizing the natural rate of unemployment: Phelps’s structural slumps and the Post Walrasian framework. In Colander D. (Ed.), Beyond Microfoundations: Post Walrasian Macroeconomics (pp. 189–206). Cambridge: Cambridge University Press. https://doi.org/10.1017/CBO9781139174626.013