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

  • Taiji Harashima

    (University of Tsukuba & Cabinet Office of Japan)

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.

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File URL: http://econwpa.repec.org/eps/mac/papers/0510/0510026.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0510026.

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Length: 35 pages
Date of creation: 31 Oct 2005
Date of revision: 31 Oct 2005
Handle: RePEc:wpa:wuwpma:0510026
Note: Type of Document - pdf; pages: 35
Contact details of provider: Web page: http://econwpa.repec.org

References listed on IDEAS
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  1. 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.
  2. Lawrence J. Christiano & Christopher J. Gust, 2000. "The Expectations Trap Hypothesis," NBER Working Papers 7809, National Bureau of Economic Research, Inc.
  3. 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 473-91, June.
  4. Athanasios Orphanides, 2002. "Monetary-Policy Rules and the Great Inflation," American Economic Review, American Economic Association, vol. 92(2), pages 115-120, May.
  5. Lars E.O. Svensson, 2002. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Working Papers 118, Princeton University, Department of Economics, Center for Economic Policy Studies..
  6. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
  7. repec:cup:cbooks:9780521233293 is not listed on IDEAS
  8. Mankiw, N Gregory, 2001. "The Inexorable and Mysterious Tradeoff between Inflation and Unemployment," Economic Journal, Royal Economic Society, vol. 111(471), pages C45-61, May.
  9. repec:cup:cbooks:9780521027922 is not listed on IDEAS
  10. Athanasios Orphanides & John C. Williams, 2004. "The decline of activist stabilization policy: natural rate misperceptions, learning, and expectations," International Finance Discussion Papers 804, Board of Governors of the Federal Reserve System (U.S.).
  11. 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 1291-98, December.
  12. V. V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1996. "Expectation Traps and Discretion," NBER Working Papers 5541, National Bureau of Economic Research, Inc.
  13. 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.
  14. Orphanides, Athanasios, 2000. "The quest for prosperity without inflation," Working Paper Series 0015, European Central Bank.
  15. Taiji Harashima, 2004. "The Ultimate Source of Inflation: A Microfoundation of the Fiscal Theory of the Price Level," Macroeconomics 0409018, EconWPA, revised 23 Sep 2004.
  16. repec:cup:macdyn:v:5:y:2001:i:1:p:101-31 is not listed on IDEAS
  17. Allan H. Meltzer, 2005. "Origins of the Great Inflation," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 145-176.
  18. Taylor, John B., 2001. "An Interview With Milton Friedman," Macroeconomic Dynamics, Cambridge University Press, vol. 5(01), pages 101-131, February.
  19. 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.
  20. Gordon de Brouwer, 1998. "Estimating Output Gaps," RBA Research Discussion Papers rdp9809, Reserve Bank of Australia.
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