Abstract

Before the onset of COVID-19 and the high inflation that followed, economies all over the world found themselves in a state of steady disinflation. Many economists viewed these developments as generally positive. However, there is an alternative theory of inflation known as The Structuralist Theory. It puts forward the idea that inflation is determined not only by variables like the money supply and interest rates, known as monetary variables, but also by other forces within the economy. These other forces are known as Structuralist variables and they tend to be outside of the direct control of the central bank. Much of the early literature focused on issues within the agricultural sector. Said issues were cited as the reason for the high inflation many Latin American countries experienced in past decades. This school of thought stood in contrast to the Monetarists, who believed that the money supply was the only variable causing this phenomenon. However, more recent literature has focused on a variety of Structuralist variables including the import price and the labor share. Notably, if the labor share and inflation have a direct relationship, this means that recent disinflation has come at the cost of increasing income inequality. This study analyzed the relationship between inflation and the labor share and import price in developing countries and as such was a combination of the old and new literature. Using fixed effects models, we found that monetary variables were the only potential determinants of inflation that had any kind of significant correlation. This is not to say that the Structuralist theory is completely wrong, only that the import price and the labor share appear to have no effect.

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