Stagflation

The stagflation ( a portmanteau of the words " stagnation " and " inflation" ) describes the state of a currency area, which will bring together economic stagnation and inflation. During a period of stagflation succeeds neither an economy, stronger utilize the production capacities through increased use of money and credit relief, nor to reduce the excessive inflation rate by a lower activity level. Both of these goals are mutually each other and thus represent an economic policy dilemma dar.

This until the end of the sixties of the 20th century world unknown phenomenon has been observed in the United States and Great Britain in 1969. The term was the early seventies in the Federal Republic used ( federal election campaign in 1972 ) to (not underemployment ) declare a comparatively long-lasting economic stagnation and a relatively high rate of inflation.

The neologism stagflation is the 1970 late British Finance Minister Iain Macleod and John Over Country attributed.

Cause and effect of stagflation

Triggers of Stagflationen are usually supply shocks that affect costs by printing the price level. Companies are forced about by rapidly rising energy prices or crop failures to increase their prices.

Such negative supply shocks are sometimes called price shocks because the producers pass on their higher production costs in the form of higher sales prices. Since the aggregate demand of the economy remains unchanged for now ( effective demand, ie the sum of planned investment and consumer spending in an economy is not directly affected by the supply shocks ), the company set at higher prices less about, then reduce production and lay off workers. Only now it comes to the typical side effects of the downward trend of the economy because of rising unemployment, shrinking incomes and disappointed sales expectations the Company expects a dampening effect on prices.

Stagflation was first observed at the end of the sixties in the UK and the USA. OPEC then short supply in 1973 due to political tensions in the Middle East oil production, thus doubling the price of oil within two years ( 1973-75 ) and made thus for a cost explosion in the western industrialized countries. The inflation rate in the U.S. in 1974 nearly doubled ( from 6% to 11%). The following year (1975 ) the U.S. unemployment rate rose to 8.4% and was thus compared to the year 1973 also nearly doubled ( 4.9%).

The timing of the impact of oil price shocks illustrates the difference between nachfrageinduziertem inflation pressure ( as a result of government stimulus program ) and caused by supply shocks inflation. While in the former, production and employment to rise in the short term and only later, prices rise comes at the latter first, the price increase and is later followed by stagnant or falling output and employment.

When the economy is exposed to a supply shock, fail the classic instruments of state economic policy. If the money supply expanded to stabilize employment, the cost induced pressure on prices reinforced. Decides the economic policy for an economic stimulus package ( including increased consumer demand of the state ) and fiscal measures (such as reduction of taxes) will indeed stabilize aggregate demand, the result would be but also have an increased level of prices, and a rise in public debt.

Economic theories of stagflation

The Phillips curve, which is in communication with the Keynesian economic theory, explains that stagflation was impossible, since according to this theory, there is a proportional relationship between economic growth and inflation. Therefore, a high rate of inflation go hand in hand with a high economic growth.

In contrast, it is argued in the monetarism that inflation will likely (ie the money supply ) caused by the oversupply of money and not affected by the demand. This means that there could be inflation, high unemployment when the state, ie today usually the central bank, the money supply increases. This relationship follows directly from the quantity equation. If the money supply is increased, so increases in the national economy, the sales volume. This higher sales volume consists of a price effect and a quantity effect. Is there a short in the national economy spare capacity, so there may be a significant volume effect, so that unemployment falls. In this case, the Phillips curve is also called Bauer curve. But if there is no spare capacity, so only the price level rises, so it comes to stagflation.

The Austrian school ( Mises, Hayek ) sees the origin of stagflation also in a too loose monetary policy of the central bank. However, contrary to the monetarists ( Friedman, Phelps ) does not distinguish between one short-and long -term effects of expansionary monetary policy, but establishing a direct causal relationship between money supply and decreasing vermehrtem goods production. The demand effect of a growing money supply is generally disputed by the Austrians. Since the fresh central bank money is not immediately available was open to all economic agents, but only a few actors, this increasingly asked by goods and led to a price increase. Those economic agents without fresh central bank could therefore buy from their available money less. Consequently, the aggregate demand effect of the increased money supply from the beginning was non-existent.

The Austrians refer instead to the principle, adverse effects of a growing money supply because production decisions and prices of goods would initially distorted by the unequal distribution of the new money. Since fresh money " out of nowhere " a redistribution from producers through to the money holders benefiting from the Fed is that producers would their means to increase production and wealth robbed and thus slowed down the overall production. Here the importance of Say's Law of the Austrian school is very clear. Since only an extension of the Offer ( and resultant, equivalent demand ) could be responsible for economic growth, had a partial and artificial increase in demand necessarily lead to wealth redistribution and weakening of the production decisions ( lower production ).

Inflation and unemployment rate

Unemployment rates in the Triad