Post-Keynesian macroeconomic models with conflict inflation

Chapter 5 introduces the post-Keynesian notion of conflict inflation. Distribution conflict between firms and workers determines the wage and profit shares and may generate conflict inflation. Distribution between rentiers (creditors) and firms (debtors) is mainly determined by interest rate policies of the central bank and is affected by (unexpected) inflation generated in the distribution conflict between workers and firms. The model generates a short-run 'inflation barrier' and thus a 'stable inflation rate of employment' (SIRE). However, it is shown that this 'inflation barrier' is endogenous to demand-determined employment and macroeconomic policies in the medium to long run through various channels. Against this background, the interaction of the SIRE with the rate of employment determined by the goods market is analysed, and it is shown that the SIRE may be highly unstable. It is argued that the effectiveness of central bank interest rate policies is asymmetric in the short run and may be detrimental in the medium to long run. It is shown that government expenditure policies do not suffer from these limitations. Then, an open economy version is presented, and the role of the real exchange rate for the stabilisation around the SIRE is examined. Finally some further endogeneity channels of the SIRE are presented: Persistence mechanisms in the labour market, wage aspirations based on conventional behaviour and long-run investment effects on the capital stock and on firms' pricing behaviour.