Inflationandmonetarypolicyinthetwentiethcentury.pdfVIP

Inflation and monetary policy in the twentieth century Lawrence J. Christiano and Terry J. Fitzgerald Introduction and summary the early part of the century behave quite differently Economists continue to debate the causes of inflation. in many ways from the data we are accustomed to study- One reason for this is that bad economic outcomes are ing. In particular, we emphasize four differences be- 4 frequently accompanied by anomalous inflation behav- tween the pre- and post-war data: ior. The worst economic performance in the U.S. in the ■ Inflation is much more volatile, and less persistent, twentieth century occurred during the Great Depression in the first half of the twentieth century. of the 1930s, and there was a pronounced deflation at ■ Average inflation is lower in the first half of the that time. Economic performance in the U.S. in the century. 1970s was also weak, and that was associated with a pronounced inflation. ■ Money growth and inflation are coincident in the So, what is it that makes inflation sometimes high first half of the century, while inflation lags money and sometimes low? In one sense, there is widespread by about two years in the second half. agreement. Most economists think that inflation cannot ■ Finally, inflation and unemployment are strongly be unusually high or low for long, without the fuel of negatively related in the first half of the century, high or low money growth.1 But, this just shifts the ques- while in the second half a positive relationship tion back one level. What accounts for the anomalous emerges, at least in the lower frequency components behavior of money growth? of the data. Academic economists attempting to understand These shifts in the behavior of inflation constitute the dynamics of inflation pursue a particular strategy. potentially valuable i