Shaikh’s Theory of Inflation: Empirical Evidence from European Countries (2001–20)

ABSTRACT

Anwar Shaikh has proposed the classical theory of inflation in his recent book Capitalism, Competition, Conflict, Crisis. Even though it is a relevant and well-founded heterodox theory, the empirical literature on the subject is scanty. In this article, we empirically evaluate the explanatory capabilities of Shaikh’s theory of inflation for the case of Europe. We constructed GMM and Fixed Effects models for the panel of 23 European countries over the period 2001–20. The overall results demonstrated that Shaikh’s classical theory of inflation generated empirically successful results in explaining the supply dynamics of European inflation, while it produced no statistically significant effect on the demand dynamics of inflation due to the European inflation level, as expected.

KEYWORDS:

• Anwar Shaikh
• classical theory of inflation
• endogenous money
• GMM

JEL:

• CODES: E11
• E12
• E31
• E41
• E51
• N14

Acknowledgements

We have greatly benefited from comments by Erinç Yeldan, Ozgur Orhangazi, Gozde Corekcioglu, Ilhan Dogus, Hasan Tekguc and two anonymous referees. We would also like to thank for the valuable comments of the participants of the Historical Materialism 2022 Conference in Istanbul and the 24th Annual Conference of the Association for Heterodox Economics at the SOAS University in London. Any remaining errors are our own.

Disclosure Statement

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

Notes

1 It is different from standart rate of profit, $r=P/K$, which is aggregate profits divided by value of capital.

2 Capacity utilization rate is targeted by enterprises because demand is jerky. So, they need large production capacity in order to keep their capabilities to meet demand and supply shocks.

3 As argued above, employment channel triggered by stimulus policy may affect profitability negatively. So, a fall in profitability may be a result of an increase in wage share due to rising aggregate demand or shrinking pool of unemployment.

4 In this case, inflation is not a case. Prices may change but very little and negligible.

5 Gross operating surplus is suggested by Shaikh as a proxy of the rate of profit (p. 896).

6 For instance, while the rate of growth utilization is 80 per cent, if you subtract 80 from 100, you have a 20 percent unutilized rate of growth utilization. In addition, we may think that 100 percent growth utilization means that capitalists decide to invest of the whole profit.

7 It is converted into a million level.

8 None of them entered the model in a statistically significant way. We controlled labor share as a proxy for real marginal cost. It is proposed by New Keynesians (Galı and Gertler, 1999). However, it does not statistically explain the variation of the GDP deflator.

9 One instrument for each variable and lag distance (for each year, the previous year is taken as an instrument.), rather than one for each time period, variable, and lag distance. In other words, when instruments are collapsed, the number of instruments for lag distance does not increase cumulatively.

10 No linearity between RNPP and GDEF may also be seen in scatter plots given in the Appendix.