Entrepreneurship, knowledge and employment

Kahn on inflation

Paesani Paolo, Department of Economics and Finance - University of Rome Tor Vergata

In recent years, downward risks to price stability have persisted in spite of unprecedented monetary expansion, economic recovery and low or falling unemployment rates. This combination, observed in Japan, the USA and the Euro area, has attracted several explanations, focusing on demographic, technological and institutional factors. This is reminiscent of past debates about the causes and consequences of inflation, which are worth reconsidering today. In this vein, this paper investigates the analysis of inflation conducted by Richard Kahn between the 1950s and the 1970s, drawing on published and unpublished archival material. Kahn regarded inflation as crucially linked to nominal wages, productivity and labour market institutions. Tracing Kahn’s views on the complex linkages between these variables and their connections with money supply, unemployment rate and inflation expectations will enable us to reconstruct a model of inflation, which combines demand-pull and cost-push factors and is applicable to different institutional contexts. This reconstruction will also enable us to qualify opinions, which have appeared in the literature and which depict Kahn as obsessed with full employment to the detriment of price stability and oblivious about the influence of expectations on inflation. Kahn regarded price stability as of primary importance, believed in the possibility of reconciling it with high employment and continually improving life-standards and thought this could be achieved by combining intelligent incomes policy, aggregate demand management and – if necessary - direct controls. These recommendations should be understood in connection with Kahn’s refutation of the quantity theory of money and the Phillips curve and with his ideas about the crucial role of expectations in determining economic decisions.

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Keywords: Kahn, theory of inflation, wages, monetary debates

Paper file