How Did It Happen? The Great Inflation of the 1970s and Lessons for Today

Edward Nelson in this Federal Reserve working paper looks at the causes of inflation in the 1970s:

The pickup in the U.S. inflation rate to its highest rates in forty years has led to renewed attention being given to the Great Inflation of the 1970s. This paper asks with regard to the Great Inflation: “How did it happen?”

The answer offered is the fact that, in both the United Kingdom and the United States, monetary policy and other policy instruments were guided by a faulty doctrine—a nonmonetary view of inflation that perceived the concerted restraint of aggregate demand as both ineffective and unnecessary for inflation control.

In the paper’s analysis, the difference in the economic policy doctrine in the 1970s from that prevailing in more recent decades is represented algebraically, with this representation backed up by documentation of policymakers’ views.

A key conclusion implied by the analysis is that the fact that a nonmonetary perspective on inflation is no longer prevalent in policy circles provides grounds for believing that monetary policy in the modern era is well positioned to prevent the recurrence of entrenched high inflation rates of the kind seen in the 1970s.

 

One Response to “How Did It Happen? The Great Inflation of the 1970s and Lessons for Today”

  1. How Did It Happen? The Great Inflation of the 1970s and Lessons for Today - Daily News DOT Says:

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