This article is an introduction to the post-Keynesian approach to inflation. It is largely based on Section 8.1.1 of Professor Marc Lavoie's Post-Keynesian Economics: New Foundations (link to my review). Similar to the work on stock-flow consistent models, we start out with what is essentially an accounting identity: a statement that is true by definition. We need to understand the implications of the accounting identity before we worry about the behavioural aspects (which are not pinned down with accounting).
(The approach here is quite distinct from conventional approaches; I discussed why post-Keynesians reject conventional inflation theory in an earlier article.)…The public conversation is moving away from so-called sound finance toward functional finance, the debate is shifting to actual financial and macroeconomic constraints rather than non-existent funding constraints like the "budget constraint." So it is becoming important to understand the details of the actual constraints — real resources and price stability. As a consequence, it is also necessary to understand the issues involving prices stability, like "inflation."
In my view, it would be better to just drop the term "inflation" as too charged with pejorative connotation in ordinary language to serve as a technical term in macroeconomics. "Price level" and "price stability" are more accurate, since policy must be concerned with both continuous increase and also decrease in the price level in a monetary production economy, e.g., owing to prior commitments involving debt, for example. Debt deflation is as poisonous as inflation of the of the price level. Price stability is also needed for planning, since it involves forward legal commitments, e.g., contracts.
Bond Economics
Primer: Post-Keynesian Inflation Theory Basics
Brian Romanchuk
