Three Essays on Inflation

In the first chapter we develop a model where firms' desired markups are determined through a bargaining between employees and employers, whose outside option is the interest rate on costs - that is, the interest rate is an opportunity cost for investing production through employing labor and, thus, becomes a source of markup shock. Firms set a price targeting this real desired markup but just some firms are able to fully protect real profits from expected inflation. Nominal wages are determined by an indexation to expected inflation coefficient, autonomous wage pressures and unemployment level. Endogenously, real profits, real wages and inflation are determined. Outcomes will differ with respect to the possibility of permanente changes in distribution and which economic regime will prevail: ‘accelerationist’ or steady-state inflation. We are interested in understanding the relation between wage inflationary structural pressure, real profits and price inflation. Do wages growing above productivity cause steady-state inflation or accelerating inflation? Do real profits return to any equilibrium level? Does exist a NAIRU? In the second chapter we apply the theoretical model developed in the first chapter for the American economy during the period 1954-2015. A discrete time version of the model is presented and all the relevant properties of the model are shown to survive to discretization. In the discrete time formulation, the model is able to generate focus as singular points. Using quarterly data, the theoretical model is econometrically estimated and the evidence confirms its main propositions. Moreover, without using statistical methods, the empirical evidence is shown to confirm the movements generated by the phase diagram of the model with remarkable clearness. The theoretical model generates a modified Phillips curve, relating unemployment and a structural wage inflation component with inflation. Structural break tests for unknown break dates determined show that the American economy has experienced a change in the Phillips curve four times. Policy implications are presented in the conclusions, with implications for aggregate demand management and for less discussed policies in the context of inflation models, like health and educational policies. In the third chapter we develop a historical study on the evolution of inflation in Brazil from 1946 until 1985. We use as reference for the analysis the model developed in the first chapter with some modifications to deal with open economy issues. Brazil during this period can be classified as a developing country experiencing a process of structural change (with expressive expansion of the industrial sector share on total output and high real output growth rates) and, differently from the United States, with chronic problems due to the balance of payments constraint. The change of political regime – democracy from 1946 until 1964, and a military dictatorship from 1964 to 1985 – is also an important feature that makes the period a natural object of study for theories that identify on the conflict between different social groups the main source of inflationary pressures. The approach followed here is more historical and less statistically oriented for two reasons: (i) traditional historical works of this period are normally based on more conventional views of inflation, such that a study that covers the whole 1946-85 period based on the conflict theory of inflation does not exist; (ii) although Brazil’s public sector at the time could not be considered either small or inefficient [Leff, 1968, Trebat, 1983], for non obvious reasons, some basic fundamental series for the present analysis – like unemployment rate and average productivity– were simply not produced periodically by oficial government institutions. Despite these problems, for annual data, there is enough information such that it is possible to conduct an empirical analysis close to the one developed in chapter II. We show that the exchange rate devaluations are the most important single explanatory variable for inflation, the changes in the relative price of agricultural commodities as the second most important factor and, with a smaller size and more statistically uncertain coefficient, the growth rate of minimum wage.