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The Cause of the Great Inflation: Interactions between the Government and the Monetary Policymakers

Author

Listed:
  • Taiji Harashima

    (University of Tsukuba & Cabinet Office of Japan)

Abstract

The paper offers a new explanation for the cause of the Great Inflation by constructing a model that explicitly separates the roles of government and monetary policymakers. A mechanism that inflation can accelerate even if an inflation target is low is uncovered. The model solves the puzzle of the observed high inflation target during the Great Inflation and indicates that the policy errors at the time were not solely attributed to the monetary policymakers but made in the process of interaction between the governments and the monetary policymakers. The model is consistent with the international aspect of the Great Inflation.

Suggested Citation

  • Taiji Harashima, 2005. "The Cause of the Great Inflation: Interactions between the Government and the Monetary Policymakers," Macroeconomics 0510026, EconWPA, revised 17 Nov 2005.
  • Handle: RePEc:wpa:wuwpma:0510026
    Note: Type of Document - pdf; pages: 35
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    File URL: http://econwpa.repec.org/eps/mac/papers/0510/0510026.pdf
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    References listed on IDEAS

    as
    1. Taylor, John B., 2001. "An Interview With Milton Friedman," Macroeconomic Dynamics, Cambridge University Press, vol. 5(01), pages 101-131, February.
    2. Taiji Harashima, 2004. "The Ultimate Source of Inflation: A Microfoundation of the Fiscal Theory of the Price Level," Macroeconomics 0409018, EconWPA, revised 30 Mar 2005.
    3. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    4. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    5. Mankiw, N Gregory, 2001. "The Inexorable and Mysterious Tradeoff between Inflation and Unemployment," Economic Journal, Royal Economic Society, vol. 111(471), pages 45-61, May.
    6. Orphanides, Athanasios & Williams, John C., 2005. "The decline of activist stabilization policy: Natural rate misperceptions, learning, and expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1927-1950, November.
    7. Chari, V. V. & Christiano, Lawrence J. & Eichenbaum, Martin, 1998. "Expectation Traps and Discretion," Journal of Economic Theory, Elsevier, vol. 81(2), pages 462-492, August.
    8. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
    9. Lawrence J. Christiano & Christopher J. Gust, 2000. "The expectations trap hypothesis," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 21-39.
    10. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
    11. Richard Dennis, 2006. "The policy preferences of the US Federal Reserve," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 55-77.
    12. repec:cup:macdyn:v:5:y:2001:i:1:p:101-31 is not listed on IDEAS
    13. Timothy Cogley & Thomas J. Sargent, 2002. "Evolving Post-World War II U.S. Inflation Dynamics," NBER Chapters,in: NBER Macroeconomics Annual 2001, Volume 16, pages 331-388 National Bureau of Economic Research, Inc.
    14. Diebold, Francis X & Senhadji, Abdelhak S, 1996. "The Uncertain Unit Root in Real GNP: Comment," American Economic Review, American Economic Association, vol. 86(5), pages 1291-1298, December.
    15. Athanasios Orphanides, 2002. "Monetary-Policy Rules and the Great Inflation," American Economic Review, American Economic Association, vol. 92(2), pages 115-120, May.
    16. Gordon de Brouwer, 1998. "Estimating Output Gaps," RBA Research Discussion Papers rdp9809, Reserve Bank of Australia.
    17. Allan H. Meltzer, 2005. "Origins of the Great Inflation," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 145-176.
    18. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Citations

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    Cited by:

    1. Harashima, Taiji, 2007. "Hyperinflation, disinflation, deflation, etc.: A unified and micro-founded explanation for inflation," MPRA Paper 3836, University Library of Munich, Germany.
    2. Harashima, Taiji, 2013. "The Phillips Curve and a Micro-foundation of Trend Inflation," MPRA Paper 51305, University Library of Munich, Germany.
    3. Harashima, Taiji, 2008. "A Microfounded Mechanism of Observed Substantial Inflation Persistence," MPRA Paper 10668, University Library of Munich, Germany.
    4. Harashima, Taiji, 2007. "The Optimal Quantity of Money Consistent with Positive Nominal Interest Rates," MPRA Paper 1839, University Library of Munich, Germany, revised 19 Feb 2007.
    5. Harashima, Taiji, 2006. "The Sustainability of Budget Deficits in an Inflationary Economy," MPRA Paper 905, University Library of Munich, Germany.
    6. Harashima, Taiji, 2007. "Why should central banks be independent?," MPRA Paper 1838, University Library of Munich, Germany, revised 19 Feb 2007.
    7. Harashima, Taiji, 2013. "Escaping a Liquidity Trap: Keynes’ Prescription Is Right But His Reasoning Is Wrong," MPRA Paper 48115, University Library of Munich, Germany.

    More about this item

    Keywords

    The Great Inflation; Inflation; Persistence; Monetary policy;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-

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