Theories of stagflation incorporate facts and concepts to explain stagflation in a well-substantiated way.
Stagflation is a period of sluggish economic growth (stagnation) and rise of price (inflation).
Types of theories of stagflation
Some of the well known established theories of stagflation include:
- Differential accumulation
- Neo-classical theory
- Quality of money theories
- Shock theory
- Quantity theories of stagflation
- Classical Keynesian theory and the Phillips curve
- Neo-Keynesian theory
Differential accumulation
Differential accumulation considers stagflation as an efficient systematic plan of action for linking acquisitions, analyzing capitalist development and crisis. The differential accumulation approach was conceptualized and developed by Shimshon Bichler and Jonathan Nitzan. This concept stresses the power by dominant capital groups to beat the average normal rate of return on investment.
The four regimes of differential accumulation are external breadth through greenfield investment, internal breadth by amalgamation, external depth through stagflation, and internal depth via cost-cutting.
Neo-classical theory
The economists in 18th and 19th centuries used the term 'classical' to explain the markets and market economies. Those theories subsequently been updated by modern economists to term it as neo-classical theory. 'Neo' literally means modern or new.
In neo-classical theory the neo-economists explains that stagflation occurs due to the excessive regulation of the government.
Shock theory
Shock theory establishes the fact that stagflation occurs due to outside forces of an economy. This theory states that stagflation can occur if an adverse shock ( like abrupt increase of oil price) influences country's total supply curve.
Quality of money theories
In modern economics, central banks play a significant role in maintaining stable prices through management of inflationary anticipation. In the event if a further stimulation of growth excite higher inflation, the central bank does not carry out growth.
Quantity theories of stagflation
According to the quantity theory stagflation occurs because of money supply and not because of demand. The other reason of the occurrence of inflation is the increase of money supply in a period of growing prices.
Classical Keynesian Theory and the Phillips curve
Classical Keynesian and the Phillips curve theory explains stagflation in the way that unemployment brings down demand for goods and services, which ultimately reduce the prices. This establishes the idea that unemployment restricts stagflation .
Neo-Keynesian Theory
Neo-Keynesian theory is the modified modern version of Classical Keynesian theory, which is based on two types of inflation. One is demand pull and the other is cost push.