Working Paper: NBER ID: w14895
Authors: Riccardo Dicecio; Edward Nelson
Abstract: We argue that the Great Inflation experienced by both the United Kingdom and the United States in the 1970s has an explanation valid for both countries. The explanation does not appeal to common shocks or to exchange rate linkages, but to the common doctrine underlying the systematic monetary policy choices in each country. The nonmonetary approach to inflation control that was already influential in the United Kingdom came to be adopted by the United States during the 1970s. We document our position by examining official policymaking doctrine in the United Kingdom and the United States in the 1970s, and by considering results from a structural macroeconomic model estimated using U.K. data.
Keywords: No keywords provided
JEL Codes: E31; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Systematic monetary policy choices in the UK and US during the 1970s influenced by a common doctrine emphasizing nonmonetary factors (E65) | Mischaracterization of inflation as a nonmonetary phenomenon (E31) |
| Mischaracterization of inflation as a nonmonetary phenomenon (E31) | Neglecting the role of monetary policy in controlling inflation (E31) |
| Nonmonetary approach dominated UK policymaking prior to 1979 (E65) | Adoption by US policymakers from the early 1970s (E65) |
| Flawed economic doctrine (P19) | Inflation outcomes that did not reflect the use of a Phillips curve model (E31) |
| Erroneous views held by policymakers (E65) | Persistent inflation despite negative output gaps (E31) |