Inflation is always and everywhere Not Conflict

Marcus Hagedorn

No 19172, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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).

Keywords: Inflation; Conflict; Price level determinacy (search for similar items in EconPapers)
JEL-codes: D52 E30 E31 E43 E52 E62 E63 (search for similar items in EconPapers)
Date: 2024-06
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