Minsky Theory of Inflation: An Empirical Analysis of OECD Countries

Abstract

This article investigates the dynamics of the four-decade-long disinflationary trend combined with cyclical inflation in OEDC countries. Minsky’s inflation model is adopted as the analytical framework and its relevance is demonstrated for modern consumption-driven economies that have gone through the globalization of the production process and the weakening of workers’ bargaining power since the 1980s. We find that unit labor cost and demand channels through household, business, and government spending are significant in explaining inflation in twenty-eight OECD countries during both the post-Bretton Woods period and the Great Moderation period. We also find evidence suggesting that central banks are not capable of achieving price stability either with their key instrument or by exploiting the trade-off between unemployment and inflation. Overall, our results contend that a more effective strategy would be demand management via fiscal policy or credit guidance and an income policy that directly affects labor bargaining power.