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The Great Inflation of the seventies: what really happened?

  • Edward Nelson

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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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2004-001.

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Date of creation: 2004
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Publication status: Published in Advances in Macroeconomics, July 2005, 5(1), Article 3
Handle: RePEc:fip:fedlwp:2004-001
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