The Great inflation of the 1970s

Abstract

The two leading explanations for the poor inflation performance during the 1970s are policy opportunism (Barro and Gordon 1983) and “inadvertently” bad monetary policy (Clarida, Gali, and Gertler 2000, Orphanides 2003). The main models of the latter category are that of Orphanides (loose monetary policy was the outcome of mis-perceptions about potential output rather than of inflation tolerance) and of Clarida, Gali, and Gertler (weak policy reaction to expected inflation led to indeterminacies). We show that both of these models can account for high and persistent inflation and also have satisfactory overall performance if an exceptionally large decrease in productivity took place at that time.