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Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (May 2007) | Stagflation, a portmanteau of the words stagnation and inflation, is a term in general use within modern macroeconomics used to describe a period of out-of-control price inflation combined with slow-to-no output growth, rising unemployment, and eventually recession. The term stagflation is generally attributed to United Kingdom Chancellor of the Exchequer, Iain MacLeod in a speech to parliament in 1965.[1][2] "Stag" is drawn from the first syllable of "stagnation", a reference to a sluggish economy, while "flation" is drawn from the second and third syllables of "inflation"--a reference to an upward spiral in consumer prices. Economists associate the presence of both factors as unit costs increase because fixed costs are spread over smaller output. Image File history File links Broom_icon. ...
A portmanteau (IPA: ) is a word or morpheme that fuses two or more words or word parts to give a combined or loaded meaning. ...
Economic stagnation, often called simply stagnation is a prolonged period of slow economic growth (traditionally measured in terms of the GDP growth). ...
Circulation in macroeconomics Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national economy as a whole. ...
CIA figures for world unemployment rates, 2006 Unemployment is the state in which a worker wants, but is unable, to work. ...
In macroeconomics, a Recession is a decline in any countrys Gross Domestic Product (GDP), or negative real economic growth, for two or more successive quarters of a year. ...
Iain Norman Macleod, PC (11 November 1913 – 20 July 1970) was a British Conservative Party politician and government minister. ...
The House of Representatives Chamber of the Parliament of Australia in Canberra. ...
Stagflation is a problem because the two principal tools for directing the economy, fiscal policy and monetary policy, offer only trade offs between growth and inflation. A central bank can either slow growth to reduce inflationary pressures, or it can allow general increases in price to occur in order to stimulate growth. Stagflation creates a dilemma in that efforts to correct stagnation only worsen inflation, and vice versa. The dilemma in monetary policy is instructive. The central bank can make one of two choices, each with negative outcomes. First, the bank can choose to stimulate the economy and create jobs by increasing the money supply (typically by creating government debt through the issuance of bonds and then loaning the money to commercial banks at low interest rates), but this risks boosting the pace of inflation. The other choice is to pursue a tight monetary policy (minimal government debt, which limits the money supply and results in higher interest rates) to reduce inflation, at the risk of higher unemployment and slower output growth. Fiscal policy is the economic term that defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. ...
Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank Money supply Fiscal policy Spending Deficit Debt Trade policy Tariff Trade agreement Finance Financial market Financial market participants Corporate Personal Public Banking Regulation Monetary policy is the process by which the government, central bank...
Look up Dilemma in Wiktionary, the free dictionary For the Nelly song, see Dilemma (song). ...
In macroeconomics, money supply (monetary aggregates, money stock) is the quantity of currency and money in bank accounts in the hands of the non-bank public available within the economy to purchase goods, services, and securities. ...
The problem for fiscal policy is far less clear. Both revenues and expenditures tend to rise with inflation, and with balanced budget politics, they fall as growth slows. Unless there is a differential impact on either revenues or spending due to stagflation, the impact of stagflation on the budget balance is not altogether clear. One school of thought is that the best policy mix is one in which government stimulates growth through increased spending or reduced taxes while the central bank fights inflation through higher interest rates. Whatever theory is employed, coordinating fiscal and monetary policy is not an easy task.
Theories of stagflation
Neo-classical theory In neo-classical economic theory, stagflation is rooted in the failure of the overall market to allocate goods and services efficiently. The root cause of which is generally thought to be excessive government regulation. The classic example of stagflation and its remedy occurred following the resignation of Richard Nixon. Price controls had been in effect for a number of years, but were released due to the range of dislocations that they had caused. The country was in a state of shock, the economy was stagnant, and inflation persisted. President Ford instigated the "WIN" policy - "Whip Inflation Now". The plan was that the market would restore a balance in the allocation of goods and services, and over time it did. Theoretically, the solution cannot be so simple. It should take changes in monetary policy to crush inflationary pressures, and a deregulation to force economic activity to more effectively reflect supply and demand. The monetary aspect of this "disinflationary" policy was pursued in the USA by Paul Volcker starting in 1979, and late in the Carter Administration. The Reagan Administration retained some elements of this policy. Neo-classical theory also prescribes increasing consumption taxes, in order to encourage saving over spending. Image File history File links Broom_icon. ...
For other persons named Gerald Ford, see Gerald Ford (disambiguation). ...
For other persons named Gerald Ford, see Gerald Ford (disambiguation). ...
Paul Adolph Volcker (born September 5, 1927 in Cape May, New Jersey), is best-known as the Chairman of the Federal Reserve (The Fed) under United States Presidents Jimmy Carter and Ronald Reagan (from August 1979 to August 1987). ...
For other persons named Jimmy Carter, see Jimmy Carter (disambiguation). ...
Shock theory One set of theories argues that stagflation occurs because of outside forces to an economy or "exogenous" factors. In this view stagflation is thought to occur when there is an adverse shock (a sudden increase, for example in the price of oil), in a country's aggregate supply curve. In the early Seventies the two shocks said to cause the spiraling prices which resulted in the Nixon era price control programs were the failure of the Peruvian anchovy catch, a major source of fertilizer for the world, and the success of the Organization of Petroleum Exporting Countries (OPEC) in constraining the worldwide supply of oil[citation needed], thus causing oil price increases. A supply shock is an event that suddenly changes the price of a commodity or service. ...
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The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ...
Not to be confused with APEC. OPEC Logo The Organization of the Petroleum Exporting Countries (OPEC) is an international cartel[1][2] made up of Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, Venezuela, and Ecuador (which rejoined OPRC in November 2007) . The...
Quality of money theories Modern monetary economics assumes that a crucial role for central banks in maintaining stable prices is management of inflationary expectations. Thus central banks make every effort to appear not to pursue growth if a further stimulation of growth would fuel higher inflation. This theory rests on the fact that the overall marketplace is attuned to the possibility that when a central bank allows excessive inflation, higher long-term interest rates result, which lead to higher prices followed by higher wage demands in subsequent labor negotiations. Left unchecked, this is seen to bring round after round of greater inflation, which is known as the "inflationary spiral". Inflation can thus be seen to be embedded in the self-fulfilling nature of inflationary expectations. One school of thought is that inflation targeting and other forms of limited central bank discretion are the best way to maintain low inflationary expectations. The Federal Reserve in the US has, however, managed to drive inflationary expectations to a quite low level while maintaining broad policy discretion. These theories are often combined with "quantity" theories of money supply, though not always. See forecasting and unexpected and expected inflation. ...
Quantity theories of stagflation Quantity theories of inflation, such as monetarism, argue that inflation is due to the money supply rather than demand and predict that inflation can occur with high unemployment if the government increases the money supply in a period of rising prices. Monetarism is a set of views concerning the determination of national income and monetary economics. ...
Classical Keynesianism and the Phillips curve In the 1960s it was thought that the Phillips curve, which was associated with Keynesian economics suggested that stagflation is impossible because high unemployment lowers demand for goods and services which lowers prices. This results in low or no inflation. However, in the 1970s and 1980s, when actual stagflation occurred, it was realized that the relationship between inflation and employment levels was not a constant, but could be shifted, and that the Phillips relationship was better seen through payroll surveys (Current Employment Statistics) of employment rather than household surveys (Current Population Survey) ([1]). Phillips curve The Phillips curve is a historical inverse relation and tradeoff between the rate of unemployment and the rate of inflation in an economy. ...
Keynesian economics (pronounced kainzian, IPA ), also called Keynesianism, or Keynesian Theory, is an economic theory based on the ideas of the 20th-century British economist John Maynard Keynes. ...
CIA figures for world unemployment rates, 2006 Unemployment is the state in which a worker wants, but is unable, to work. ...
The 1970s decade refers to the years from 1970 to 1979, also called The Seventies. ...
The 1980s refers to the years from 1980 to 1989. ...
This article is about work. ...
The Current Population Survey (CPS) http://www. ...
Neo-Keynesianism Neo-Keynesian theory developed a more detailed model of inflation which argued that there are two kinds of inflation--demand pull and cost push. Stagflation, in this view, is caused by cost push inflation, which could be the result of monetary policy, insufficient resiliency of the economy or from purely external factors. In this case the strategy for defeating stagflation is to cut the money supply, hoping to cut inflation to manageable levels, then increase the money supply to spur economic growth. This "disinflationary" Neo-Keynesian policy was pursued in the USA by Paul Volcker during the Carter Administration. Paul Adolph Volcker (born September 5, 1927 in Cape May, New Jersey), is best-known as the Chairman of the Federal Reserve (The Fed) under United States Presidents Jimmy Carter and Ronald Reagan (from August 1979 to August 1987). ...
For other persons named Jimmy Carter, see Jimmy Carter (disambiguation). ...
Differential accumulation Differential accumulation theory sees stagflation (which oscillates inversely with periods where mergers and acquisitions is dominant) as a major strategy of dominant capital groups to beat the average and exceed the normal rate of return on investment. Stagflation, which appears as a crisis at the societal level, contributes significantly to differential accumulation at the disaggregate level, that is, of dominant capital groups accumulating faster than smaller businesses. Since the 20th century, the dominant capital group which has benefited from stagflation has been the "weapon-dollar-petrodollar coalition" during periods of Mid-east crises and rising oil prices. These periods have oscillated between periods of relative "peace" during which mergers and acquisitions have been the dominant strategy for beating the average. Differential Accumulation is a new approach for analysing capitalist development and crisis, tying together mergers and acquisitions, stagflation and globalization as integral facets of accumulation. ...
The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business...
Historical stagflation
Stagflation in the late Classical Keynesian Period (1968-1982) Stagflation occurred in the economies of the United Kingdom in the 1960s and 1970s and the United States during the 1970s, most famously during the Carter Administration. The difficulty in fitting its existence within a Keynesian framework led to a greater acceptance of monetarist theories in the 1970s and 1980s. The pendulum has to some extent swung back in the other direction, as monetarism has seemed to encounter increasing difficulty predicting the demand for money and the long period of low inflation and high employment during the Y2K/Dot-Com Bubble of the late 1990s and again during the 2004-2006 period, which temporarily drove oil prices high enough to measureably increase inflation during the first three quarters of 2006. The 1960s decade refers to the years from 1960 to 1969. ...
For other persons named Jimmy Carter, see Jimmy Carter (disambiguation). ...
Monetarism is a set of views concerning the determination of national income and monetary economics. ...
Monetarism is a set of views concerning the determination of national income and monetary economics. ...
The dot-com bubble was a speculative bubble covering roughly 1995–2001 during which stock markets in Western nations saw their value increase rapidly from growth in the new Internet sector and related fields. ...
For the band, see 1990s (band). ...
Year 2004 (MMIV) was a leap year starting on Thursday of the Gregorian calendar. ...
Year 2006 (MMVI) was a common year starting on Sunday of the Gregorian calendar. ...
The monetarists would respond that inflation was remarkably stable during the dotcom boom and recession and that the oil price driven inflation was nothing more than the natural increase in price of one commodity rather than true inflation. The rise in oil prices was just that, a rise in oil prices. It had nothing to do with the value of the overall currency even if consumers lost effective currency as a result. The elimination of oil as a commodity would eliminate this "inflation".
Stagflation worries in the present During 2006, certain economists believed that global stagflation might return when the price of oil was close to $80 a barrel, and the US Federal Reserve was increasing interest rates. Commentators such as Stephen Roach and Paul Krugman cited a cooling housing market combined with a failure to adjust monetary policy as potentially leading to higher than "comfort zone" inflation and slower growth. Stephen S. Roach - Is a senior executive with Morgan Stanley, the New York-based investment bank. ...
Paul Krugman Paul Robin Krugman (born February 28, 1953) is an American economist. ...
The worries multiplied in 2007. On February 27th China's reaction to its complex domestic policy binds triggered a shock to financial markets (DJIA down 5%)as well as a reminder of the danger China had raised in February 2005 when Chinese economist Fan Gang, director of the state-owned National Economic Research Institute in Beijing, recommended publicly [World Economic Forum, January, 2005] that China sell its hoard of U.S. Treasury debt into the world market because interest rates were too low. China is the second-largest holder of U.S. Treasury debt in the world (after Japan). Such an action would send U.S. interest rates soaring, according to most generally-accepted models of the global economy, since such a massive sale would immediately drive down bond values, thereby raising not only the effective interest rate on existing bonds but also the market into which new bonds were sold. These models show that U.S. interest rates would soar. The polico-economic indication from these models was that the U.S. Federal Reserve was already in the policy bind that would contribute to stagflation.
Two days earlier (2-26-2007) former U.S. Federal Reserve Chairman Alan Greenspan predicted a possible recession in the U.S. before the year 2007 was over. Some took this to be an indication that his model also recognized that China's policy binds had created a U.S. policy bind which prevented anti-recessionary action by the U.S. Federal Reserve. Others postulated that the higher interest rates prevailing in the U.S. in 2007 were known by him to be the U.S. response that was implemented to forestall the possibility of China's massive bond sale. Still others voiced the conclusion reached after the Nixon-era price controls, that high interest rates were in and of themselves inflationary, since the cost of money was factored into models for the unit cost of everything from the price of wheat to the cost of making a high-budget film in Hollywood, a microeconomic measure prevailing in some modern economic models.
At its May 2007 meeting, the U.S. Federal Reserve (FOMC Minutes, May 9, 2007, U.S. Treasury Dept.) made the following policy statement: "In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information." The across-the-board reaction was that the widely anticipated July 2007 lowering of U.S. interest rates was no longer feasible, and the Fed's response confirmed to many who maintain a polico-economic model that U.S. economic policy was unfolding in a manner that confirmed that the policy bind which accompanies Stagflation was becoming more visibly present.
On May 11th former U.S. Federal Reserve Chairman Alan Greenspan redefined the odds on a U.S. recession during 2007 from "possible" to "1-in-3".
May ended with the widely publicized report that foreign holdings of U. S. Treasury debt maturing in the three-to-ten year range had reached the 80% level, sparking comparisons to 19th Century America when European lenders provided financing for building U.S. infrastructure projects such as railroads and canals. Today's worries leave U.S. domestic economic policy hostage to international economic factors flowing from spiraling U.S. trade deficits and government deficits.
The first two weeks of June 2007 brought reports that China's trade surplus for the previous month had exceeded $22 billion, which moved the United States Congress, the OECD and the IMF to forcefully describe China's trade and exchange rate policies as "unfair". Also in June China began to show a reluctance to increase its hoard of U.S. Treasury debt and is thought to be the Asian seller with daily offerings of 10-year Treasury notes in the overnight market. This action drove down values and thereby increased the interest yield from its long-established rate below 5.0% to the 5.1-5.2% range with peaks at 5.3%.
Despite these adverse signals and an oil price approaching $70 per barrel, there was sufficient optimism for investors to trigger the stock market to its largest three-day advance in 18 months on the occasion of the June 15th triple witching Friday. Triple witching hour is the last hour of the stock market trading session (3:00-4:00 P.M., New York Time) on the third Friday of every March, June, September, and December. ...
The testimony of Federal Reserve Chairman Ben S. Bernanke before the Joint Economic Committee of the U.S. Congress on November 8, 2007, noted that "prices of crude oil and other commodities had increased sharply in recent weeks" and that "the foreign exchange value of the dollar had weakened" -- "factors were likely to increase overall inflation in the short run and, should inflation expectations become unmoored, had the potential to boost inflation in the longer run as well." (A discussion of "inflation expectations" in the section above discussing "Quantity of money theories" of stagflation shows the importance of this matter.)
Ultimately, the current worry had reached epic proportions in the prospect of global stagflation - a phenomenon never before encountered.
The prospect of global stagflation came to light in late November when the European Union's statistics office in Luxembourg said European inflation accelerated in November to the fastest in more than six years. On the same day the United States Federal Reserve Chairman Ben Bernake when speaking at the presentation of the Citizen of the Carolinas Award, Charlotte Chamber of Commerce, Charlotte, North Carolina November 29, 2007, indicated that despite inflation worries, a further round a rate cuts will be likely on December 11, 2007. Source: http://www.federalreserve.gov/newsevents/speech/bernanke20071129a.htm
Responses to stagflation Stagflation undermined the dominant Keynesian consensus, and placed renewed emphasis on microeconomic behavior, particularly neo-classical economics with its attempt to root macroeconomics in microeconomic formalisms. The rise of conservative theories of economics, including monetarism, can be traced to the perceived failure of Keynesian policies to combat stagflation or even properly explain it. Microeconomics is the study of the economic behaviour of individual consumers, firms, and industries and the distribution of production and income among them. ...
Neoclassical economics is the grouping of a number of schools of thought in economics. ...
Monetarism is a set of views concerning the determination of national income and monetary economics. ...
Stagflation in the USA was defeated by then Federal Reserve chairman, Paul Volcker, who sharply increased interest rates to reduce money supply from 1979-1983 in what was called a "disinflationary scenario." Starting in 1983, fiscal stimulus and money supply growth combined to create a sharp economic recovery which is in line with standard macro-economic models; however, there was a five-to-six-year jump in unemployment during the Volcker disinflation. It appears that Volcker trusted unemployment to self-correct and return to its natural rate within a reasonable period, which it did. Paul Adolph Volcker (born September 5, 1927 in Cape May, New Jersey), is best-known as the Chairman of the Federal Reserve (The Fed) under United States Presidents Jimmy Carter and Ronald Reagan (from August 1979 to August 1987). ...
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Supply-side economics emerged as a response to US stagflation in the 1970s. It largely attributed inflation to the ending of the Bretton Woods system in 1971 and the lack of a specific price reference in the subsequent monetary policies (Keynesian and Monetarism). Supply-side economics asserts that the contraction component of stagflation resulted from an inflation-induced rise in real tax rates (see bracket creep). In addition certain states in the USA had laws limiting nominal interest rates, which under high inflation resulted in negative real interest rates. In some places this caused a collapse in lending to business. Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates. ...
Wikipedia does not have an article with this exact name. ...
Bracket creep describes the process by which inflation pushes wages and salaries into higher tax brackets. ...
Notes - ^ Online Etymology Dictionary. Douglas Harper, Historian. http://dictionary.reference.com/browse/stagflation (accessed: May 05, 2007).
- ^ British House of Commons’ Official Report (also known as Hansard), 17 November 1965, page 1,165.
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