Is French (dis)inflation explained by conflicting-claims theory? Evidence from cointegration with structural break

ABSTRACT

The aim of this article is to provide an explanation of French (dis)inflation based on the conflicting-claims theory. Making use of cointegration techniques with structural breaks, we bring some empirical evidence suggesting the soundness of such a theory in order to explain the variation of inflation in the long run. Amongst our main results, we show that the transition from the Great Inflation of the 1970s to the Great Moderation was the consequence of a dramatic collapse in the bargaining power of both workers and firms. As a secondary objective, it is also an attempt to fill the gap with other competing theories of inflation since the conflicting-claims approach is characterized by a relative paucity in terms of empirical works.

KEYWORDS:

• Inflation
• conflicting claims
• structural break
• great moderation

JEL CLASSIFICATION:

• C52
• E31
• E65

Acknowledgement

I benefitted greatly from the constructive comments of two anonymous referees. I want to thank Christopher Sutcliffe, Charlotte Fever and Philippe Lavil. Obviously, they cannot be held responsible for any remaining errors.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ However, this does not mean that Post-Keynesians ignore microfoundations. Several authors have built agent-based models with unorthodox microfoundations (assuming the existence of thousands of workers learning and interacting with each other). See, amongst others, Seppecher (2012) who finds results similar to heterodox macro-models not microfounded.

² Deriving $\omega =\left(w/p\right)l$ with respect to time gives $\hat{\omega }=\hat{w}-\hat{p}+\hat{l}$ and assuming we are in steady-state ($\hat{\omega }=0$), we find that $\hat{w}+\hat{l}=\hat{p}$. Then, in presence of productivity gains ($\hat{l}<0$) nominal wage growth may be greater than price inflation without modifying income distribution. In Figure 1, taking productivity into account would shift the $\hat{w}$ curve by the exact value of $\hat{l}$ without changing the slopes of $\hat{w}$ and $\hat{p}$. Given the main purpose of our paper, we leave such considerations for future research.

³ On exchange rate and monetary policy see Vera (2010) and Zambrano (2014).

⁴ The stabilization plan is announced in September 1963 by the Prime Minister Georges Pompidou. However, it was in the mind of the President Charles De Gaulle and wanted by him against some of his ministers since January as underlined by Peyrefitte (2002, 530). Among the main measures of the plan we find : price controls, an increase in the rate of interest, a very strict control of Government spending (except for investment), a moderate rise in taxes for white-collars, a decrease in import duties related to manufacturing goods and a control of the amount of credit granted by the banking system.

⁵ See: https://travail-emploi.gouv.fr/IMG/pdf/Constat_de_Grenelle.pdf.

⁶ Monetary dialogue with Christine Lagarde, Brussels, 5 June 2023.