Fiscal Policy: Why Aggregate Demand Management Fails and What to Do about It

Related publications

• Working Paper No.1037 10 January 2024

  Markups, Profit Shares, and Cost-Push-Profit-Led Inflation

  Michalis Nikiforos, Simon Grothe and Jan David Weber
  Abstract

  The post-pandemic surge in inflation was accompanied by a surge in the corporate share of profits. As a result, several economists and policy makers have given to it names such as “profit-led inflation” or “sellers’ inflation.” The present paper discusses the extent to which profit-led inflation, as an explanation for the recent surge in inflation, is compatible with what we know about the price-setting behavior of firms, income distribution, and inflation. We do that in juxtaposition to two recent critiques: that the increase in the profit share is the result of cyclical factors, and that the increase in import prices leads to higher profit shares even under constant markups. We show that there is little evidence that the recent surge in profitability is cyclical in nature. Moreover, after outlining the Structuralist/Kaleckian theories of prices and inflation we argue that profit-led inflation does not require an increase in the markup of the firms and is consistent with these theories. In the face of large import and other price shocks even under constant markups, firms are able to pass the burden of adjustment to real wages. Thus, the term profit-led emphasizes the distributional source and consequences of inflation. We also provide an empirical examination of the markups in the post-pandemic period using data from the Compustat database. We show that, on average, firms were able to increase or maintain their markups, although there is significant heterogeneity across sectors or the position of the firms in the distribution of markups.

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• Working Paper No.1028 21 August 2023

  Contractionary Effects of Foreign Price Shocks (and Potentially Expansionary Effects of Inflation)

  Michalis Nikiforos and Simon Grothe
  Abstract

  Using the model proposed in Krugman and Taylor’s “Contractionary effects of devaluation” (1978), we examine the macroeconomic effects of shocks to foreign prices. We show that these shocks can be contractionary for two reasons: (i) because they imply a loss of income if an economy has a trade deficit or import prices increase proportionally more than export prices; (ii) because there is a redistribution of income from wages to profits and rent, which leads to a decrease in consumption and output (as the wage earner's propensity to consume is higher than those of profit earners and rentiers). An endogenous reaction of nominal wages to the increase in the price level might lead to even higher increases in prices, but mitigates the negative macroeconomic effects of the foreign price shocks because it reduces their negative distributional effects. If the proportional increase in nominal wages is higher than that of domestic prices, the distributional effect becomes positive. The opposite is the case with markups. If they increase in reaction to higher prices, they contribute to further price increases but they also exacerbate the negative distributional effects. The paper also provides an analytical solution for a general case of the model of Krugman and Taylor.

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• Working Paper No.1026 01 August 2023

  Banking Sector, Distributive Conflict, and Monetary Theory of Distribution

  Riccardo Zolea
  Abstract

  This paper analyzes the implications of distributional contrast for the monetary theory of distribution. The first step is to try to introduce the banking sector within Pivetti's monetary distribution theory approach. Pivetti in fact does not analyze the links between the central bank and the banking sector. It therefore seems interesting to study what role the banking sector and the financial capitalists play in this framework. Thus, an attempt is made to model the banking sector and its links to the production sector within the framework of Pivetti’s approach. As this integration does not present any particular theoretical problems, the paper discusses then the ability of the aforementioned approach to explain the coexistence of near-zero (if not negative) interest rates and low real wages. The difficulty in explaining this economic phenomenon opens the way to a more general discussion of the dynamics inherent in the contrast between workers and capitalists and between financial and productive capitalists. Thus, the analysis shows that six different distributional configurations are possible (plus two others that are unstable or unrealistic), of which only two can be explained through Pivetti's monetary theory of distribution. The other four can be explained by elaborating more recent approaches that continue, enrich, and develop Marx's approach.

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