How Stagflation Changed Monetary Policy
Published March 1, 2021
During the 1950s and 1960s, the Keynesian interpretation of monetary policy appeared to be correct. But stagflation in the 1970s ran contrary to the Keynesian model, which did not predict simultaneous high unemployment and inflation. As a result, new attitudes toward monetary policy were developed.
- What was the source of high inflation and high unemployment in the 1970s?
- Why is monetary policy important for the economy?
Additional Resources
- Watch as Milton Friedman discusses monetary policy. Available here.
- Watch “Monetary Policy: Rules vs. Discretion,” with John Taylor. Available here.
- Watch “Understanding Monetary Policy,” with John Taylor. Available here.
- Watch “National and International Monetary Reform,” with John Taylor. Available here.
On the whole, during the ’50s and the ’60s, it looked as if the Keynesian interpretation was right.
After all, during that period, we had relatively prosperous countries, relatively stable prices, and relatively low interest rates.
It was a golden era, as it were, and everybody was said to be operating on Keynesian lines.
What really changed the public perception and also the professional perception was the experience of the 1970s.
During the 1970s, you had a combination that under Keynesian analysis could not exist. You had high inflation and high unemployment at the same time—named stagflation—and that combination was really ruled out by the simple kind of Keynesian analysis that was in vogue. But it was that experience which more than anything else led to a basic change in public and intellectual attitudes toward money.