Stagflation

Stagflation is a term which is formed by joining the words stagnation and inflation. It is a newly developed term which is used in modern macroeconomics to give a description of a period of uncontrollable price inflation combined with sluggish output growth. Stagflation raises unemployment.

A central bank decelerates growth to bring down inflationary pressures or sometimes allows to raise the price for hastening the growth. The dilemma is that adjusting stagnation can worsen inflation and vice versa.

Stagflation is a term which is formed by joining the words stagnation and inflation. It is a newly developed term which is used in modern macroeconomics to give a description of a period of uncontrollable price inflation combined with sluggish output growth. Stagflation raises unemployment.

A central bank decelerates growth to bring down inflationary pressures or sometimes allows to raise the price for hastening the growth. The dilemma is that adjusting stagnation can worsen inflation and vice versa.

The central bank can decide to induce the economy by increasing the money supply through the purchase of government debt. This can propel to raise the inflation rate.

The central bank can opt for a tight monetary policy by reducing purchases of government debt. This will consequently raise the interest rates and reduce the inflation rate. The impact is higher unemployment and sluggish output growth.

Theories of stagflation

Some of the established theories of stagflation includes:

• Shock theory
• Neo-classical theory
• Quantity theories of stagflation
• Quality of money theories
• Classical Keynesianism and the Phillips curve
• Differential accumulation
• Neo-Keynesianism

Shock theory

The shock theory states the reason behind the occurrence of stagflation, which is the outside forces to an economy. In shock theory, stagflation is supposed to occur because of adverse shock in a country’s overall supply curve.

Neo-classical theory

Neo-classical theory states that the reason behind the occurrence of stagflation is the excessive government intervention.Quality of money theories

In this theory, the central bank does not normally pursue growth, if it does not excite higher inflation.

Quantity theories of stagflation

This theory establishes an idea which states that inflation occurs due to the money supply rather than demand.

Classical Keynesianism and the Phillips curve

In this theory, it was thought that stagflation is hard to exist, because high unemployment brings down the demand for goods, which results in low inflation.

Neo-Keynesianism

This theory defines two types of inflation. One is demand pull and another is cost push.

Differential accumulation

This theory treats stagflation as an important systematic plan of action of dominant capital groups.

Stagflation- Causes and Measures

 

• Theories of Stagflation
   
• Stagflation and Phillips Curve
   
• Stagflation in 1970s
   
• Stagflation in the World
   
• Stagflation 2007