Origins of the Great Inflation

2006-07-29T00:00:00Z (GMT) by Allan Meltzer

The Great Inflation from 1965 to 1984 is the climactic monetary event of the last part of the 20th century. The paper analyzes why it started and why it continued for many years. Like others, it attributes the start of the inflation to analytic errors, particularly the widespread acceptance of the simple Keynesian model with its implication that monetary and fiscal policy should be coordinated. In practice, that meant that the Federal Reserve financed a large part of the fiscal deficit. The paper gives a large role to political decision-making. Continuation of inflation depended on political choices, analytic errors, and the entrenched belief that inflation would continue.