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The Great Inflation of the seventies: what really happened?

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Abstract

This paper revisits the issue of what factors motivated the macroeconomic policies that led to the Great Inflation of the 1970s. A satisfactory explanation must be consistent with (1) the estimated monetary policy reaction function; (2) the timing patterns relating monetary policy developments and inflation; and (3) the record of economic views (manifested in statements by policymakers and prominent financial commentators). It is argued that the monetary policy neglect hypothesis - which claims that policymakers took a nonmonetary view of the inflation process - meets all three criteria. Other explanations are ruled out, with one exception (the output gap mismeasurement hypothesis), which supplements the monetary policy neglect hypothesis. This conclusion is based on a study of the Great Inflation in both the U.K. and the U.S., and draws on both quantitative and archival evidence, particularly news coverage.

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  • Edward Nelson, 2004. "The Great Inflation of the seventies: what really happened?," Working Papers 2004-001, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2004-001
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    Inflation (Finance); Monetary policy;

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