6. The inﬂationary process 1 INTRODUCTION It can be readily seen from our previous discussion of the NCM (especially Chapter 2) that the view of inﬂation within the NCM is one of ‘demand pull’ only. The simple model used in Chapter 2 drew heavily on the reduced form of the Phillips curve in which price inﬂation was linked to output (relative to trend) and expected inﬂation, and hence with demand. In this chapter we outline what we see as a more suitable framework for the analysis of the ‘inﬂationary process’. In our perspective on inﬂation, demand and changes in demand have a role to play, but there are other important ingredients, notably the role of cost and distributional pressures, imported inﬂation, the size of productive capacity and endogenous money. These other ingredients are of equal, if not of greater, importance in our understanding of the ‘inﬂationary process’. Another important ingredient of the NCM approach is the assertion of a supply-side equilibrium level of output (or, equivalently, employment) which is unaffected by the path of the economy. This may be seen by reference to equation (2.2) in Chapter 2, where a zero output gap corresponds to this supply-side equilibrium. This generates the signiﬁcant conclusion that deﬂationary policies (whether designed to reduce inﬂation or used for other purposes) do not have any long-lasting impact on the level (or growth) of output. The nature of the supply-side equilibrium is also of considerable...
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