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Journal of Financial Economics
REF 153 Inflations

publication : April 2024 324 pages

 Inflations

Introduction Free access


Hans-Helmut KOTZ Jean-Paul POLLIN
Inflation is back! Unexpectedly and massively Until the summer of 2021, market participants, analysts, as well as policymakers expected inflation in the euro area to flatline below its target of (symmetrically around) 2%. In fact, since the mid-2010s, the harmonized consumer price index (HCPI) had hovered around 1.5% (see Figure 1 below). During that period, policymakers were concerned about the…

 Histories of Inflation

The Origin and Persistence of Inflation: Insights from History


Maxime MENUET
JEL classification : E31 E62 N10

This article reviews some of the main economic ideas on inflation and relates them to historical events. We show that the period from the 15th to the 20th century was not a long triumphal road for quantitative theory. A study of the 20th century suggests that inflation can be the consequence of wars, of price controls in times of crisis, or distributional conflicts in society. In addition, we focus on some stylized facts, such as the significance of anchoring household expectations or the impact of fiscal policy. Finally, we underline the failure of current macroeconomic theory to understand the origins and the persistence of inflation.

Hyperinflation: on the Centennial of the German Experience of the 1920s, a Look Back


Marc-Alexandre SÉNÉGAS Patrick VILLIEU
JEL classification : E40 E50 E60 N14 N24

To mark the centenary of the German hyperinflation of 1920-1923, this article reviews the way in which macroeconomic analysis has been able to understand the phenomenon of hyperinflation. It reviews the main mechanisms that theory has identified as being at work behind the genesis, development, and end of the hyperinflationary process. The almost perfect example of German hyperinflation under the Weimar Republic is then used to illustrate these mechanisms.

Disinflation in Italy: 1980-1997


Ignazio VISCO
JEL classification : E31 E58 G01

After the high inflation associated with the two oil shocks of the 1970s, a gradual process of disinflation took place in Italy over the following fifteen years. This paper examines the extent to which central bank autonomy, effective and innovative income policies and contractual agreements, and finally the long-delayed achievement of meaningful budgetary control all played a role in the return to monetary stability.

 Inflation: Differing Across Countries and Income Groups

The Cost-of-Living Crisis in the Euro Area: Lessons Learned


Helene SCHUBERTH
JEL classification : E24 E31 E64

Five narratives haven't framed the perception and assessment of Europe's cost of living crisis: monetary policy has mainly been deemed as the best means to get inflation back on target. Policymakers should refrain from direct price control measures, in particular in the energy sector, otherwise they risk distorting resource allocation. Views about the fundamental drivers of inflation have shifted between excessive profit and wage claims, with the dominating concern ultimately becoming the risk of a wage price spiral. European economies, which are net energy importers, were hit by a negative terms-of-trade shock, requiring an income-distribution neutral orientation for wages on the GDP deflator instead of the CPI, which includes imported goods. Finally, policy should focus on supporting low-income households. However, in some countries establishment macroeconomics thinking prevented strategic price controls and measures to prohibit price gouging from being taken.

Inflation: Reemerging in France


Mathieu PLANE Gaston VERMERSCH
JEL classification : E24 E31 E61

After reaching 5.2% in 2022, then 4.9% in 2023, inflation in France should fall back below 3% in 2024, then converge towards 2% thereafter. The inflationary episode was relatively short-lived, but this can be explained by the decline of energy prices and active public policies that limited energy inflation, as well as by wages, which did not keep pace with inflation to the detriment of workers' purchasing power. As a result, the current downturn in inflation has little to do with monetary policy, and is primarily due to the decline of energy prices and wages not keeping up with inflation. Finally, higher but controlled inflation would make it possible to reduce the debt burden by increasing potential nominal growth in a French economy that is largely characterized by fixed-rate, long-maturity borrowing.

Energy Price Brakes and Tax Relief: Germany's Anti-Inflation Policies After the 2022 Terms-of-Trade Shocks


Sebastian DULLIEN Silke TOBER Silke TOBER
JEL classification : E31 E58 E63

The price shocks of 2022-2023 gave rise to soaring inflation and economic stagnation in Germany. In response, the German government adopted various policy measures with the threefold aim of stabilizing the economy, reducing the social divide, and preventing second-round effects that risk inflation persisting. These policies were largely successful. Given the transitory nature of the shocks and the limited second-round effects – contained in part by targeted fiscal measures in the euro area – the ECB's strongly restrictive policy stance unnecessarily intensified economic weakness in the euro area.

Root Causes of the Inflation Surge in the US


Hélène BAUDCHON
JEL classification : E31 E60 E64

The chronology of the 2021-2022 inflationary shock is quite clear. What is less so, behind the multitude and confluence of sources, is the role played by supply and demand factors. A simple analysis of the contributions of the main items of the consumer price index to US inflation highlights the greater relative importance of core inflation compared to energy and food inflation, and thus suggests that US inflation is more demand-driven than supply-driven. Other more advanced studies, however, temper this view by highlighting the importance of supply factors as well, through the role played by the series of shocks to energy, raw goods, and commodity prices. It even appears that, without these supply factors, demand-side inflation would not have been as high. While, in early 2024, the process of disinflation is well under way, partly thanks to determined central bank action, there is still some way to go before inflation returns to the 2% target on a sustainable basis. Also, in the future, 2% could be more of a floor than a ceiling.

The Inflationary Shock in Emerging and Developing Countries


Pierre JACQUET
JEL classification : E31 O10 O20 O40

The global inflationary shock affected developing countries in different ways. Its effects were compounded by monetary policy responses in developed countries. Above all, it represented a major shock, both in terms of increased poverty, particularly in the least developed countries, whose great vulnerability to international conditions it once again emphasizes, and in terms of risk assessment and the availability of external financing, as evidenced by the difficulties linked to foreign debt.

 Approaches to Making Sense of Inflation

Is the Phillips Curve Relevant to Understanding the Connection between Inflation and Unemployment?


Christophe BLOT
JEL classification : E31 E32 E37

Although the Phillips curve plays an important role in macroeconomic models, empirical studies have often shown that the link between inflation and unemployment is actually weak or even non-existent. This article shows that the Phillips curve remains a relevant framework for analyzing inflation and understanding the inflation-unemployment relationship. The instability of the estimations results both from the difficulties of measuring labor market tensions and inflation expectations, and from the curve's non-linear character. In addition, changes in monetary policy strategy since the 1980s and the globalization of economies may affect the correlation between inflation and unemployment.

Money Growth and the Post-Pandemic Surge in Inflation


Claudio BORIO Boris HOFMANN Egon ZAKRAJŠEK
JEL classification : E31 E51 E58

The strength of the link between money growth and inflation depends on the inflation regime: it is one-to-one when inflation is high and virtually non-existent when it is low. A link was also clearly visible in the risk of moving from a low to a high-inflation regime in the aftermath of the pandemic. A surge in money growth preceded the inflation flare-up in 2021-2022, as countries with stronger money growth saw markedly higher inflation. Moreover, keeping an eye on money growth would have helped to improve inflation forecasts. The disinflation that began in most countries in mid-2022 was also preceded by a marked decline in money growth. However, over this second sub-period, the cross-country link between money growth and inflation is visible only if countries with very high inflation rates are included in the sample. All this indicates that money growth does convey information about inflation, but that it cannot be easily used in a reliable way.

The Heterogeneous Effects of Inflation in France and in the Eurozone


Erwan GAUTIER Jérémi MONTORNÈS
JEL classification : C43 D30 E31

This article examines the heterogeneous impact of inflation on different categories of households in France and the euro area between mid-2021 and the end of 2023. Differences in consumption patterns between households and inflation dispersion across products generated inflation inequalities. The inflationary episode, driven by rising prices of imported goods, mainly affected households that spend a larger share of their income on energy and food. In France, inflation differentials between income quintiles were low during this period, but differentials by age and area of residence were more pronounced. Gas subsidies and price caps significantly contributed to reducing inflation inequalities.

Inflation, Structural Change, and Distribution Conflict: Lessons for Economic Policy


Jean-Luc GAFFARD Mauro NAPOLETANO Francesco SARACENO
JEL classification : E25 E31 E52 E64

The standard theory of inflation is that it is a global phenomenon that can only last and intensify because of a wage price spiral that expresses a fundamental conflict between capital and labor. Without seeking to deny this aspect of the problem, we aim to show that inflation also has a structural aspect, making the distributional conflict more complex to analyse and requiring an anti-inflation policy that is not limited to monetary policy. The challenge is to prevent the economy from shifting from a low-inflation to a high-inflation regime, from structural to global, out-of-control inflation.

 Where Do We Go From Here?

Inflation Targeting in an Uncertain Environment


Pierre JAILLET Jean-Paul POLLIN
JEL classification : E31 E52 E58

The recent price shock has sparked a debate on the inflation target, which has been the main pillar of central bank strategies since the 1990s. This article looks first at the theoretical question of the inflation rate before discussing the conditions that justify the choice of a 2% target. It then examines the arguments for and against changing this benchmark, before considering some alternative policy options. The conclusion is that, in all cases, central banks will have to justify the relevance of their policy goals on economic grounds better than they do today. 

Inflation and Corporate Market Power: Lessons from Recent Crises


Benoît CŒURÉ
JEL classification : E31 E64 L10

Economists and central bankers have discussed the responsibility of businesses in the inflation surge of 2022-2023. By raising their sales prices, companies may have contributed to the spread, and even the amplification, of the cost shock. Over the long term, structural changes can have strengthened the role of companies (as opposed to workers) in driving inflation, but in the short term, the link between market power and the transmission of cost shocks is ambiguous. Larger companies do charge higher prices, but they are also more able to absorb temporary shocks. In general, “profitflation” did materialize in 2002-2023, but it seems to have been a temporary phenomenon, less pronounced in France than elsewhere in Europe. In 2024 and beyond, as energy prices normalize, wages rise, and inflation gradually returns to 2%, it will be important to closely monitor the return to normal corporate margins and to avoid downward rigidities that would sustain inflation. Competition policy can play a useful role in identifying sectoral rents and punishing behavior likely to contribute to price increases.

Inflation and Fiscal Policy: in Search of a New Paradigm


Xavier RAGOT
JEL classification : E31 E58 E63

Numerous fiscal tools have contributed to stabilizing inflation during recurring economic crises over the past fifteen years: price caps, economic stimulus, paid furloughs, tax credits, etc. These policies are consistent with recent studies showing that budgetary tools are powerful levers for stabilizing activity and inflation. A new framework for pragmatic coordination of budgetary and monetary policies is therefore required, which must adapt to the institutional frameworks of each country. In Europe, it has been proposed that independent fiscal institutes that are responsible for informing national parliaments be provided with inflation analysis goals and adequate analytical resources.

 Financial History Chronicle

Counting Patents over the Long Term


Romain DIEBOLT Magali JAOUL-GRAMMARE
The patent system faces a paradox. It has never been so successful, while at the same time it is the subject of severe criticism (Bessy, 2019). In fact, current forms of financialization of intellectual property suggest new business models, with the patent becoming a “quasi financial asset” (Le Bas et al., 2011; Galvez-Behar, 2022).In this respect, the pharmaceutical industry is an experimental…

 Finance and Literature

Thomas Mann and the Disillusions of Progress


Alain-Gérard SLAMA
Strange as it may seem, inflation per se has not been a literary subject. What has stirred the imagination is hyperinflation. From the row over the assignat to the collapse of the ruble, which contributed to the fall of Yeltsin and the arrival of Putin, only the great monetary dramas, accompanied by major political crises – whether consequence or cause – have captured the attention of writers.…

 Various

Dupuit, Colson and the Early Days of the SNCF: the Road to Yield Management


Joachim DE PAOLI
JEL classification : B10 B20 L92 L93 N70

The yield management is the main method used nowadays by airlines companies in order to set their prices. It is often presented as an innovation developed in the airline sector in the United States at the end of the 1970's. However, this paper demonstrates that it has important similarities with an older theory: the pricing method of infrastructures exploited by a monopoly proposed by Jules Dupuit in 1844, developed by Clément Colson in 1890 and applied by the SNCF (French railroad company) at its creation in 1937. Indeed, yield management is based on Dupuit's idea of charging each user a price as close as possible to the use value attributed to transportion. To get users to reveal this use value, low-cost companies use an option mechanism found in Colson's developments and in the pricing system used when the SNCF was created.