Stepping on a rake: The role of fiscal policy in the inflation of the 1970s

Research output: Contribution to journalReview article

39 Scopus citations

Abstract

The inflation of the 1970s in the US is often discussed as if the only type of policy action that could have prevented the inflation were monetary policy actions and the only type of policy errors that might have induced the inflation were monetary policy errors. Yet fiscal policy underwent dramatic shifts in the 1970s and economic theory makes clear that in an environment of uncertainty about future fiscal policy, monetary policy instruments may lose potency or have perverse effects. This paper documents the vagaries of fiscal policy in this period and argues that people at the time must have been uncertain about fiscal policy's future course. It also lays out a theoretical framework for understanding the effects of fiscal uncertainties on monetary policy and shows that fiscal variables have predictive value in dynamic models, even if traditional monetary policy indicators are included in the system.

Original languageEnglish (US)
Pages (from-to)48-56
Number of pages9
JournalEuropean Economic Review
Volume55
Issue number1
DOIs
StatePublished - Jan 1 2011

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Fiscal
  • Inflation
  • Monetary

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