Research on Currency Stability, Inequality, and Business Cycles

Since 2022, the inflation levels in the United States and other countries have continued to rise, reaching rarely seen historical highs, and the stability of currency values in various countries has been challenged as a result. The causes of this round of inflation are diverse, including the localized anti-globalization that began before the pandemic, such as the impact of trade wars, as well as the impact of factors like supply chain disruptions after the pandemic and the Russia-Ukraine conflict. However, income inequality and asset price changes are also important long-term influencing factors.

In measuring inflation levels, countries generally use indicators such as the Consumer Price Index (CPI) and core CPI, but these are not perfect measures of inflation. The rising price of a single product can drive up the overall CPI, even if its impact on people’s overall living standards is limited (e.g., the significant increase in energy prices due to the Russia-Ukraine conflict). Moreover, the CPI and other indicators do not fully reflect the actual consumption demand of residents. For example, housing prices in China have risen rapidly in recent years, and the prices that residents need to pay when purchasing commodity housing have also increased accordingly. However, asset prices and rental prices are not taken into account, or they have a limited weight in the calculation of China’s CPI, which does not accurately reflect the change in real purchasing power.

Considering these issues, we were inspired by Piketty and creatively used a new indicator: the Dynamic Price Index with Labor Income (DPIL) to measure changes in currency purchasing power. In the calculation of DPIL, we comprehensively considered the impact of multiple factors such as asset prices, inequality, and commodity prices, more accurately reflecting the changes in currency purchasing power. Based on this, we conducted an empirical analysis of historical data from eleven countries, including the United States, Japan, and Germany, exploring the fluctuations in currency value stability in history and discovering conclusions derived from this.

Long-term economic growth and business cycles are two major topics in economic research. Neoclassical, neo-Keynesian, and monetarist schools have all revolved around these topics, with numerous works discussing the success and failure of nations. However, the issue of income distribution has gradually been pushed to the margins of economic development. In fact, Ricardo’s work already includes a detailed analysis of the distribution of national income. The contradictions in the political and economic life of countries around the world are more or less related to the widening income distribution gap. Sometimes, governments adopt compromise measures to deal with these contradictions for the sake of long-term economic growth and stability, but theoretical exploration and institutional construction have relatively stagnated. Intuitively, if we strip away the issue of inequality, this book is not much different from the classic neo-Keynesian Phillips curve; it is only by incorporating durable goods prices and security returns in traditional inflation calculations that the policy conclusions obtained differ slightly from traditional theories. However, theoretical exploration and historical data validation have shown the enormous vitality of incorporating inequality issues into traditional business cycle research. Intuitively, if a person’s wage growth rate lags far behind the bill growth rate needed to maintain their living standards, they can subsidize their relative wage shrinkage through their past wealth accumulation. For a young person, they need to achieve an improvement in living standards and an initial accumulation of wealth through their labor income. If their wages shrink relative to their living expenses, they can only rely on their parents’ wealth transfer to ensure a relatively stable living standard. If this state persists for a relatively long time in the entire economy, social class mobility will stagnate, and the middle class will struggle to expand. The inflation and deflation of living expenses targeted by monetary policy continuously affect the changes in social strata in such a pattern of national income distribution, and the inequality of income distribution changes the foundation of social stability like hidden reefs in water. Piketty’s research results show that the pattern of national income distribution is constantly evolving endogenously, and monetary policy, as an important part of economic development, should consider income distribution issues. In fact, the importance of income distribution issues should be far greater than the business cycles discussed in this book itself. Through this theoretical framework, the book demonstrates the importance of income distribution issues for monetary policy. The neo-Keynesian Phillips curve has already taken into account the proportion of labor income in national income distribution, but it lacks the discussion of capital stock. One of the contributions of this book is incorporating capital stock into the discussion. In our exploration of the DPIL in various countries, we discovered the connection between it and the real business cycles, and we will further explore its performance in Chinese history in our subsequent third book.

In the preface, Professor Xia Chun wrote: “The two young authors of this book, Luo Weihan and Zhang Zhen, were obviously inspired by Piketty, recognizing the importance of money and inflation, especially their impact on business cycles, from their research on inequality. In the book, they attempt to construct a new index to depict the true extent of inflation, such as incorporating changes in asset prices into the inflation indicator, which is a very bold and innovative idea.”