Economics Essays - Inflation

Economics Essays - Inflation-48
Specifically, it was generally believed that permanently lower rates of unemployment could be “bought” with modestly higher rates of inflation.The idea that the “Phillips curve” represented a longer-term trade-off between unemployment, which was very damaging to economic well-being, and inflation, which was sometimes thought of as more of an inconvenience, was an attractive assumption for policymakers who hoped to forcefully pursue the dictates of the Employment Act.It was, according to one prominent economist, “the greatest failure of American macroeconomic policy in the postwar period” (Siegel 1994).

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The orthodoxy guiding policy in the post-WWII era was Keynesian stabilization policy, motivated in large part by the painful memory of the unprecedented high unemployment in the United States and around the world during the 1930s.

The focal point of these policies was the management of aggregate spending (demand) by way of the spending and taxation policies of the fiscal authority and the monetary policies of the central bank.

Except during periods of global crisis, this was the first time in history that most of the monies of the industrialized world were on an irredeemable paper money standard.

The late 1960s and the early 1970s were a turbulent time for the US economy.

It eventually declined to average only 3.5 percent in the latter half of the 1980s.

Economics Essays - Inflation

While economists debate the relative importance of the factors that motivated and perpetuated inflation for more than a decade, there is little debate about its source.And in the 1960s, the US dollar was anchored—albeit very tenuously—to gold through the Bretton Woods agreement.So the story of the Great Inflation is in part also about the collapse of the Bretton Woods system and the separation of the US dollar from its last link to gold.In other words, the trade-off between lower unemployment and more inflation that policymakers may have wanted to pursue would likely be a false bargain, requiring ever higher inflation to maintain.Chasing the Phillips curve in pursuit of lower unemployment could not have occurred if the policies of the Federal Reserve were well-anchored.The idea that monetary policy can and should be used to manage aggregate spending and stabilize economic activity is still a generally accepted tenet that guides the policies of the Federal Reserve and other central banks today.But one critical and erroneous assumption to the implementation of stabilization policy of the 1960s and 1970s was that there existed a stable, exploitable relationship between unemployment and inflation.It had been in this vicinity over the preceding six years.Inflation began ratcheting upward in the mid-1960s and reached more than 14 percent in 1980.At the conclusion of World War II, Congress turned its attention to policies it hoped would promote greater economic stability.Most notable among the laws that emerged was the Employment Act of 1946.

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