Working Paper: NBER ID: w31099
Authors: Guido Lorenzoni; Ivan Werning
Abstract: This paper isolates the role of conflict or disagreement on inflation in two ways. In the first part of the paper, we present a stylized model, kept purposefully away from traditional macro models. Inflation arises despite the complete absence of money, credit, interest rates, production, and employment. Inflation is due to conflict; it cannot be explained by monetary policy or departures from a natural rate of output or employment. In contrast, the second part of the paper develops a flexible framework that nests many traditional macroeconomic models. We include both goods and labor to study the interaction of price and wage inflation. Our main results provide a decomposition of inflation into “adjustment” and “conflict” inflation, highlighting the essential nature of the latter. Conflict should be viewed as the proximate cause of inflation, fed by other root causes. Our framework sits on top of a wide set of particular models that can endogenize conflict.
Keywords: inflation; conflict; macroeconomic models
JEL Codes: E0; E12; E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| conflict (D74) | inflation (E31) |
| agents' desires to exert market power (D43) | inflation (E31) |
| conflict over relative prices (D74) | inflation (E31) |
| inflation (E31) | persistent inflation (E31) |
| conflict component (D74) | sustained inflation (E31) |
| adjustment component (J33) | limited inflation (E31) |
| traditional macroeconomic factors (E66) | conflict (D74) |