Working Paper: NBER ID: w1453
Authors: Frederic S. Mishkin
Abstract: This paper attempts to provide a perspective on the causes of inflation by exploring why sustained inflations occur and the role of monetary policy in the inflation process. The conclusion reached in this paper is that in the last ten years there has been a convergence of views in the economics profession on the causes of inflation. As long as inflation is appropriately defined to be a sustained inflation, macro-economic analysis, whether of the monetarist or Keynesian persuasion, leads to agreement with Milton Friedman's famous dictum, "Inflation is always and everywhere a monetary phenomenon." However, the conclusion that inflation is a monetary phenomenon does not settle the issue of what causes inflation because we also need to understand why inflationary monetary policy occurs. This paper also examines this issue and it finds that the underlying cause of inflationin the United States has been accommodating monetary policy geared to achieving a high employment target. The role of expectations has been important in the inflationary process so that to prevent the resurgence of inflation at a minimum cost in terms of unemployment and output loss, monetary policy must be both non-accommodating and credible.
Keywords: inflation; monetary policy; employment; expectations
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary Policy (E52) | Inflation (E31) |
| Money Supply Growth (O42) | Sustained Inflation (E31) |
| Accommodating Monetary Policy (E52) | Higher Inflation (E31) |
| Expectations of Inflation (E31) | Actual Inflation Outcomes (E31) |
| Accommodating Monetary Policy (E52) | Demand-Pull and Cost-Push Inflation (E31) |
| Budget Deficits (H62) | Inflation (E31) |