The "Great Inflation"
Overview of Perspectives
- François R. Velde, "Poor Hand or Poor Play? The Rise and Fall of Inflation in the U.S.," Federal Reserve Bank of Chicago Economic Perspectives, First quarter 2004, pp. 34–51.
Velde (2004) provides a readable overview of the various theories about the sources of high inflation in the U.S. beginning in the 1960s, culminating with the appointment of Paul Volcker in 1979 and the subsequent disinflationary experience.
The essay by DeLong (1997) that begins Velde's article is (in my opinion) a truly classic bit of modern economic history. Although not formally required, I strongly encourage you to read it. Another (shorter) overview of competing hypotheses concerning the "Great Inflation" is available in Lansing (2000). (Optional readings.)
- J. Bradford DeLong, "America's Only Peacetime Inflation: The 1970s," published in Reducing Inflation: Motivation and Strategy, Christina Romer and David Romer, eds., (Chicago: University of Chicago Press) 1997.
- Kevin Lansing, "Exploring the Causes of the Great Inflation," Federal Reserve Bank of San Francisco Economic Letter #2000-21, July 7, 2000.
The "Narrative Approach" and its Critiques
- David and Christina Romer, "Changing Views About Stabilization Policy: A Historical Perspective," Proceedings of the Federal Reserve Bank of Kansas City 2002 Economic Policy Symposium, 2002. pp. 11–78.
- Thomas Sargent, "Commentary," Proceedings of the Federal Reserve Bank of Kansas City 2002 Economic Policy Symposium, 2002. pp. 79–94.
The 2002 Economic Policy Symposium at Jackson Hole, sponsored by the Federal Reserve Bank of Kansas City, is entitled Rethinking Stabilization Policy. It contains several interesting papers on the Federal Reserve policy, including the above paper by Romer and Romer that gives a particular interpretation of the role of the Fed — and of the influence of academic economists on policy makers — in the "Great Inflation" experienced in the U.S. in the 1970s. (Note that the starting point of their story is also the DeLong (1997) essay.) Sargent is fairly critical of their approach, and a lively general discussion by other economists followed. All are worth reading.
Other Perspectives
Throughout the semester we have encountered alternative interpretations of why inflation was relatively high in the U.S. in the 1970s. A number of optional additional readings, each with a slightly different perspective on the causes of the U.S. inflationary experience in the second-half of the twentieth century, are collected below.
- Athanasios Orphanides, "The Quest for Prosperity without Inflation," Journal of Monetary Economics, v. 50, n. 3, April 2003, pp. 633–663.
Orphanides (2003) offers a more data-driven interpretation of the inflation of the 1970s: his main argument is that the Fed, rather than being soft on inflation, was misinformed — and, in effect, wildly optimistic — about the actual level of potential output.
- Paolo Surico, "Measuring the Time-Inconsistency of U.S. Monetary Policy," European Central Bank Working Paper #291, November 2003.
Surico (2003) investigates the importance of the time-inconsistency story we analyzed earlier in the course for understanding the post-war history of inflation in the U.S. He finds some evidence that favors this interpretation.