This article discusses the key underlying causes of the “Great Inflation” of the 1970s and identifies its main lessons for monetary policy. Evidence points towards a crucial role played by policy mistakes in generating the Great Inflation. First, a comparison between the US experience and that of Germany 1 and Switzerland – which, during the 1970s, followed a “hard-money” monetary policy explicitly aimed at keeping inflation under control – casts serious doubt on the “bad luck” explanation of conventional wisdom, according to which the Great Inflation was simply the result of a series of large negative supply shocks. Second, the fact that the beginning of the Great Inflation in the United States, in the mid-1960s, pre-dates the large negative supply shocks of the early 1970s, poses a fundamental problem for explanations ascribing the inflationary outburst to such shocks. Third, a convincing case has been made that OPEC’s oil price increases…
View original post 4,882 more words
Recent Comments