The Great Inflation of the Seventies: What Really Happened?

Abstract

Abstract This paper revisits the issue of what factors produced the macroeconomic policies that led to the Great Inflation of the 1970s. I emphasize that a satisfactory explanation should satisfy two important criteria. First, it must be consistent with the record of views on the economy, manifested in statements by policymakers and prominent financial commentators. Second, it should work for countries beside the United States. I show that the monetary policy neglect hypothesis–which claims that policymakers took a nonmonetary view of the inflation process–meets these criteria. Other explanations of the Great Inflation are ruled out, with one exception (the output gap mismeasurement hypothesis), which supplements the monetary policy neglect hypothesis. The study covers the Great Inflation in both the United Kingdom and the United States, with policymakers’ views on the economy documented using 1970s news reports.