What Have We Learned about Disinflation?

Abstract

U.S. MONETARY POLICY since 1979 has been geared to stopping inflation. It has had considerable success in doing so, but at a great cost in lost output and high unemployment, not only in the United States, but throughout the world. In Europe unemployment rose steadily from 1979 to 1982 and is expected to rise further in 1983. In the United States, unemployment rose to 10.7 percent at the trough of the recession in the fourth quarter of 1982, more than I1/2 points above the previous postwar record reached at the worst point of the severe 1975 recession. The duration of economic weakness in the present disinflation period distinguishes it from previous postwar recessions even more than the amount by which unemployment rose and the level that unemployment reached. If the brief bounce-back in economic activity after mid-1980 is ignored, the recent U.S. recession lasted twelve quarters. The previous postwar record was the five-quarter recession of 1974-75. All other postwar recessions had lasted less than a year. By the end of 1983 the cumulative excess of unemployment over its 1979 level will be about 11 percentage point-years, corresponding to an estimated $700 billion to $900 billion of forgone GNP in today's prices. This severe recession has been accompanied by a dramatic slowing in the rate of inflation. Table 1 summarizes several measures of inflation that reflect that slowdown, including widely used measures of actual inflation rates, which are affected by many special developments not closely associated with the underlying inflation problem, and some alternative measures of the underlying inflation rate. During the 1978-