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Stagflation – Definition

Stagflation – Definition

Stagflation is a combination of ‘Inflation’ and ‘Stagnant Economic Growth’. This slow pace of economic growth is further hampered by rise in inflation, prices, and unemployment. As GDP goes down and inflation goes up, an economy reaches a state of ‘Stagflation’. Academics differ in their opinion on how this state comes to be and there’s a lack of conclusive evidence that defines the parameters of the problem.

A Little More on What is Stagflation

Stagflation is a double edged sword that makes it harder for governments to deal with it. Measures to counter inflation have an adverse effect on economic growth thereby worsening one part of the problem to address the other. Conversely, policies aimed at reducing unemployment and give a boost to the economy worsen the situation with a further rise in inflation.

Stagflation is a state wherein the high unemployment rates lead to decline in spending, even as the price of goods increases further affecting spending negatively. It is an unnatural phenomenon since lull in economic growth isn’t conducive to rise in inflation. Weak economic growth arrests inflation, but Stagflation defies this principle.

Iain Macleod first used the term ‘Stagflation’ while speaking in the House of Commons in the United Kingdom in 1960. He was speaking of inflation on the one hand and stagnant growth on the other hand and combined the terms. The economic recession period that haunted the United States economy in the 1970s is usually described as a period of ‘Stagflation’.

Development of the ‘Misery Index’ that measures the general public feeling during tough economic times was a direct result of the emergence of the term Stagflation.

Theories on the Causes of Stagflation

Stagflation is explained by two significant theories.

  1. Stagflation theory that posits that the rising cost of oil is the culprit behind the rise in inflation and cost of goods as the manufacturing and transportation sectors are also adversely affected.
  2. Economic theory that posits that poor economic policies eventually lead to the phenomenon of Stagflation. Examples of such policies include excessive printing of currency notes while no checks and balances are in place to keep inflation low.

Examples of Stagflation

The economic phase in the United States between 1973 to 1975 saw successive quarters of increasing inflation while the GDP growth was on a steady decline. By May of 1975, unemployment rates were at 9% with inflation tripling in pace. This period of Stagflation lasted a few years.

While some economists lay the blame on OPEC’s embargo of oil on Western countries, driving up production and transportation costs, others cite President Nixon’s poor economic policies as the reason behind this lean phase. A consensus is yet to be arrived at.

References for Stagflation

Academic Research on  Stagflation

The share economy: Conquering stagflation, Weitzman, M. L. (1986). ILR Review, 39(2), 285-290. This paper looks at ways to beat Stagflation through the share economy.

The rise and decline of nations: economic growth, stagflation, and social rigidities, Hoel, A. H. (1984). International Challenges, (2), 34. This paper studies economic trends across the globe, their rise, fall, different states like growth, Stagflation, and the associated social limitations.

Does devaluation cause stagflation?, Gylfason, T., & Schmid, M. (1983). Canadian Journal of Economics, 641-654. This paper explores the idea of devaluation causing Stagflation.

Do we really know that oil caused the great stagflation? A monetary alternative, Barsky, R. B., & Kilian, L. (2001). NBER Macroeconomics annual, 16, 137-183. This paper presents an alternative theory to the widely accepted Oil crisis, as to the actual reason for the US economic stagflation of the 1970s.

Causes of the current stagflation, Grubb, D., Jackman, R., & Layard, R. (1982). The Review of Economic Studies, 49(5), 707-730. This paper studies data from 19 countries to examine the causes of Stagflation.

Stagflation, persistent unemployment and the permanence of economic shocks, Brunner, K., Cukierman, A., & Meltzer, A. H. (1980). Journal of Monetary Economics, 6(4), 467-492. This paper focuses on the problem of unemployment during economic Stagflation and the resulting economic tremors.

Economic ‘stagflation’ and public support for the political system, Weatherford, M. S. (1984). British Journal of Political Science, 14(2), 187-205. This paper examines public opinion on the political apparatus in times of economic stagflation.

Supply vs. demand approaches to the problem of stagflation, Bruno, M., & Sachs, J. D. (1979). This paper tries to examine the problem of Stagflation via the supply vs. demand statistics.

Management & consumers in an era of stagflation, Shama, A. (1978). The Journal of Marketing, 43-52. This paper looks at the behavioral economics of consumers and management during Stagflation.

Comparative macroeconomics of stagflation, Helliwell, J. F. (1988). Journal of Economic Literature, 26(1), 1-28. This paper studies the external macroeconomic factors that influence Stagflation with sample data from the Malaysian economy.

Stabilization, stagflation, and investment incentives: The case of Kenya, 1979-1980, Branson, W. H. (1986). In Economic adjustment and exchange rates in developing countries (pp. 267-294). University of Chicago Press. This paper looks at the Kenyan economy in the years 1979 – 1980 to examine its state of Stagflation, stabilization measures, and investment incentives.

The supply-shock explanation of the Great Stagflation revisited, Blinder, A. S., & Rudd, J. B. (2012). In The Great Inflation: The rebirth of modern central banking (pp. 119-175). University of Chicago Press. This paper studies the period between 1973 and 1974 in the United States economy to breakdown the reasons for its state of Stagflation.

Oil price shocks, monetary policy and stagflation, Kilian, L. (2009). This paper sheds light on Stagflation in view of the Oil prices and economic policies dealing with monetary affairs.

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