HistoricalU.S.MoneyGrowth,Inflation,andInflation.pdfVIP

NOVEMBER/DECEMBER1998 William G. Dewald is the retiring Research Director of the Federal Reserve Bank of St. Louis. Gilberto Espinoza provided research assistance. *Earlier versions of this paper were presented at the Morgan Stanley Dean Witter Interest Rate Conference, Little Rock, Arkansas, May 6, 1998; the Conference on the Conduct of Monetary Policy, Institute of Economics, Academia Sinica, Taipei, Taiwan, June 12, 1998; and the Institute of Developing Economies, Tokyo, Japan, June 17, 1998. between such nominal variables and real Historical U.S. output. Data from the bond market show that, despite in?ation being at its lowest level Money Growth, in decades, the Fed has not regained fully the in?ation credibility that it lost in the Inflation, and 1960s and 1970s. Inflation NOMINAL AND REAL Credibility* GROWTH, AND INFLATION The ?nancial press and the public often William G. Dewald seem to believe that the way to contain in?ation is to pursue policies that reduce real economic growth. The view that it INTRODUCTION necessarily takes lower real growth, or even a recession, to slow in?ation is an lthough many forces affect individual improper reading of historical data. It fails prices in the short run, the historical to differentiate between the short run and Arecord shows that in the long run the long run. Sustained real output growth changes in the general level of prices, i.e., depends on increases in the supply of labor in?ation, have been linked systematically and capital,