The Fed Tackles Kalecki: Thinking about Kaleckian Philips Curve

Mario Seccareccia and Guillermo Matamoros Romero in this INET article review one of the 2022 Federal Reserve papers which wrote about Kaleckian Philips Curve:

A recent US Federal Reserve staff working paper written by David Ratner and Jae Sim (2022) has captured widespread attention, especially among economists, who, like ourselves, believe that a repeat of the anti-inflation policy scenario of the early 1980s of sharply raising central bank interest rates might prove inappropriate, if not catastrophic, as solution to dealing with the current inflationary environment. While inflation is hurting the poor disproportionally more because of their low incomes, a steep across-the-board rate hike may be a remedy that is worse than the disease, particularly since, as it has been well established (see, for instance, Storm 2022), we are not primarily facing with a demand-side inflation.

Indeed, not only might the inflation rate be quite insensitive to falling aggregate demand pressures, but sharp and persistent increases in interest rates could devastate many poor working households which would face the specter of increasing unemployment. This concern is amplified by the fact that, unlike the situation in the early 1980s, these poor households now tend also to be very heavily indebted as a proportion of their personal disposable incomes and may face even greater risk of insolvency both because of higher interest rates and because of the increasing unemployment (see Costantini and Seccareccia, 2020).

The US Fed working paper on Kalecki’s economics, dated September 2021, but which appeared only recently, is a breath of fresh air. Ratner and Sim (2022) claim that the Phillips curve in the United States and the United Kingdom has been almost flat since the 1980s because of the significant erosion of the bargaining power of workers. This began during the Reagan and Thatcher years, and which was especially reflected in declining union density rates over the last four decades. Thus, the supposed triumph over inflation for roughly four decades, until the surge during this last year of Covid-19, cannot be fully attributed to the conduct of monetary policy by the US Fed and the Bank of England. The Fed working paper, therefore, casts serious doubt on the mainstream narrative, which posits that the policy of the late Fed Chairman Paul Volcker of large hikes in interest rates was responsible for taming the 1980s inflation. If the Volcker shock was actually not what caused the long-term change in the dynamics of the inflation rate since the 1980s, and until the current Covid-19 crisis, then what was the culprit that flattened the Phillips curve?

The main takeaway of their paper is clear: interest rate hikes could have helped but it was rather the class conflict — particularly the offensive against the working class — that stood behind the inflation debacle of the Great Moderation, which had long-term consequences. Putting it that way, this could sound quite subversive to many mainstream economists. Indeed, as Nick Peterson (2022) writes in the Financial Times: “coming from deep inside the Fed this is near heresy. After all, central banks have naturally long been in thrall to theories that made them the heroes of the story.”


We believe that their main contribution is the introduction of the “Kaleckian” Phillips curve to the canonical Two-Agents New Keynesian (TANK) model with monopolistic competition (in this case, the two agents are workers and firms). This tweak implies that, apart from the usual bargaining over wages, there would be bargaining over the product price (or monopoly rents). Workers through labor unions would try to keep the markup as low as possible so that wages and the labor share would be larger, whereas firms would try to do the opposite. The degree of bargaining power would determine the winners and losers in the distribution of monopoly rents. It follows that the “Kaleckian” Phillips curve explains why the inflation and unemployment rates have been relatively low since the 1990s — without considering the recurrent crises and the most recent inflationary episode — because the bargaining power of workers has been extremely limited.

Kaleckians will not be happy with certain aspects of the Kaleckian Philips Curve:

Finally, we suspect that Kaleckians might be uncomfortable in calling the paper’s curve a “Kaleckian” Phillips curve. While it is true that the degree of bargaining power affects the Phillips curve in the authors’ model, the former is just a parameter exogenously determined, i.e., given the bargaining power of workers, the NAIRU and the natural rate of interest are pinned down and are unique, which is inconsistent with Kaleckian economics. Kaleckians, and more generally post-Keynesian economics, explicitly reject the existence of a NAIRU or a natural rate of interest. Therefore, a genuine Kaleckian Phillips curve would portray a horizontal segment that might depend on the bargaining power of workers, among other institutional factors but, as remarked by Kalecki (1943) in his “Political Aspects of Full Employment”, the bargaining power depends on the rate of employment and monetary policy, which is itself influenced by class conflict as well.

As we have already discussed above, the shape of a genuine Kaleckian/Post-Keynesian Phillips curve could depict a flat part but surrounded by downward-sloping segments or even an upward-sloping segment given by a hypothetical full-employment situation, as suggested by Seccareccia and Khan (2019). It is also very likely that the trends in the unemployment rate have affected the bargaining power of workers and the conflict over the distribution of income (Seccareccia and Matamoros Romero 2022). Last, partly as a result and since monetary policy is embedded in the class conflict, the Volcker shocks, and the subsequent high-interest rates policies — up to the financial crisis of 2008-09 — should be seen as part of the policies that eroded the bargaining power of workers and not as an independent phenomenon, as Ratner and Sim seem to posit. Central banks would themselves be taking sides in the class struggle.


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