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Origins of the Great Inflation

  • Allan H. Meltzer

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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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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  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. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, December.
  3. Michael D. Bordo & Anna J. Schwartz, 1997. "Monetary Policy Regimes and Economic Performance: The Historical Record," NBER Working Papers 6201, National Bureau of Economic Research, Inc.
  4. 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.
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