The New Paradigm Papers of the Month of December

Inflation Surprises and Election Outcomes

Jonathan Federle, Cathrin Mohr, Moritz Schularick

High inflation was one of the decisive factors for Trump’s re-election. A new study by the Kiel Institute for the World Economy shows that this may not have been an isolated case. Based on election results in 18 industrialized nations since 1948, the authors find that unexpectedly high cumulative price increases significantly boost the election outcomes of extremist and populist parties. The main driver of this effect is the real wage losses associated with inflation. According to the study, solid economic growth and wage increases can mitigate the shock of unexpectedly high inflation and reduce the appeal of extremist parties.

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Growth and Fluctuations: An Overview

Joseph E. Stiglitz

In a new essay, Nobel laureate Joseph Stiglitz strongly criticizes the standard dynamic stochastic general equilibrium (DSGE) models of modern macroeconomics for attributing fluctuations to exogenous shocks (instead of endogenous components of the economic system) and thus contributing little to understanding the real causes of economic crises. Therefore, the policy recommendations derived from such models are flawed. In the essay, Stiglitz describes alternative models with heterogeneous capital goods and actors, often based on older Keynesian foundations. Their features include imperfect markets with fragile networks and endogenous innovation in a constantly evolving economy marked by great uncertainty. According to Stiglitz, these theories provide better insights into the causes and nature of fluctuations and offer improved policy guidance by focusing on endogenously driven economic cycles.

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Political Power and Market Power

Bo Cowgill, Andrea Prat, Tommaso Valletti

One argument against a high concentration of wealth among a few individuals is the potential undermining of democratic processes. A recent study published as an NBER Working Paper examines this relationship in the context of corporations. Do companies with greater market power also seek to exert more political influence? The authors investigate this empirically by analyzing whether corporate mergers in the U.S. from 1999 to 2017 led to increased lobbying expenditures or campaign donations. The findings indicate that mergers result in a sustained increase in lobbying activities by both individual companies and industry associations (the effect on campaign donations is less clear). A causal link between market power and political power also has implications for competition policy.

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Implicit Coordination in Sellers’ Inflation: How Cost Shocks Facilitate Price Hikes

Isabella Weber, Evan Wasner, Markus Lang, Benjamin Braun, Jens van ’t Klooster

A recently published paper investigates how companies use economy-wide cost increases as a coordination mechanism for price hikes. Using over one hundred thousand transcripts of quarterly earning calls from publicly listed U.S. companies between 2007 and 2022, the authors show that large general input cost increases often correlate with positive statements by executives regarding price adjustments. When input prices increase only for specific companies, however, management tends to express negative sentiments about price hikes and attempts to absorb these shocks. The authors, led by Isabella Weber, employ a sentiment analysis using large language models (LLMs). This suggests that companies deliberately use such shocks to raise prices and secure or expand profits, providing new evidence for the academic debate on “sellers’ inflation.”

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