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Origins of the Great Inflation

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  • Allan H. Meltzer

Abstract

The Great Inflation from 1965 to 1984 is the climactic monetary event of the last part of the 20th century. This paper analyzes why it started and why it continued for many years. Like others, it attributes the start of inflation to analytic errors, particularly the widespread acceptance of the simple Keynesian model with its implication that monetary and fiscal policy should be coordinated. In practice, that meant that the Federal Reserve financed a large part of the fiscal deficit. This paper gives a large role to political decisionmaking. Continuation of inflation depended on political choices, analytic errors, and the entrenched belief that inflation would continue.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2005)
Issue (Month): Mar ()
Pages: 145-176

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Handle: RePEc:fip:fedlrv:y:2005:i:mar:p:145-176:n:v.87no.2,pt.2

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Related research

Keywords: Inflation (Finance) ; Economic history ; Monetary policy;

References

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  1. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  2. Richard G. Anderson & Robert H. Rasche, 1999. "Eighty years of observations on the adjusted monetary base: 1918-1997," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 3-22.
  3. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, October.
  4. Bordo, Michael D. & Schwartz, Anna J., 1999. "Monetary policy regimes and economic performance: The historical record," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 3, pages 149-234 Elsevier.
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Citations

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Cited by:
  1. Brian Snowdon, 2007. "The New Classical Counter-Revolution: False Path or Illuminating Complement?," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 541-562, Fall.
  2. Shu-Chun S. Yang & Nora Traum, 2010. "Monetary and Fiscal Policy Interactions in the Post-War U.S," IMF Working Papers 10/243, International Monetary Fund.
  3. Weise, Charles L., 2009. "Political Constraints on Monetary Policy During the U.S. Great Inflation," MPRA Paper 18700, University Library of Munich, Germany.
  4. Peter M. Summers, 2005. "What caused the Great Moderation? : some cross-country evidence," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-32.
  5. Weise, Charles L, 2008. "Political constraints on monetary policy during the Great Inflation," MPRA Paper 8694, University Library of Munich, Germany.
  6. Sharon Kozicki & P.A. Tinsley, 2007. "Perhaps the FOMC Did What It Said It Did: An Alternative Interpretation of the Great Inflation," Working Papers 07-19, Bank of Canada.
  7. Taiji Harashima, 2005. "The Cause of the Great Inflation: Interactions between the Government and the Monetary Policymakers," Macroeconomics 0510026, EconWPA, revised 31 Oct 2005.
  8. Benati, Luca, 2009. "Would the Bundesbank have prevented the Great Inflation in the United States?," Working Paper Series 1134, European Central Bank.

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