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The causes of inflation

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  • 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.
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Suggested Citation

  • Frederic S. Mishkin, 1984. "The causes of inflation," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 1-32.
    • Handle: RePEc:fip:fedkpr:y:1984:p:1-32
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    References listed on IDEAS

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    1. Frederic S. Mishkin, 1983. "A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models," NBER Books, National Bureau of Economic Research, Inc, number mish83-1.
    2. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-115, March.
    3. George L. Perry, 1983. "What Have We Learned about Disinflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 587-602.
    4. Eisner, Robert & Pieper, Paul J, 1986. "A New View of the Federal Debt and Budget Deficits: Reply," American Economic Review, American Economic Association, vol. 76(5), pages 1156-1157, December.
    5. Stanley Fischer, 1984. "Contracts, Credibility, and Disinflation," NBER Working Papers 1339, National Bureau of Economic Research, Inc.
    6. Eckstein, Otto, 1984. "Foundations of Aggregate Supply Price," American Economic Review, American Economic Association, vol. 74(2), pages 216-220, May.
    7. Frederic S. Mishkin, 1983. "Introduction to "A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models"," NBER Chapters, in: A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models, pages 1-6, National Bureau of Economic Research, Inc.
    8. Blanchard, Olivier J, 1984. "The Lucas Critique and the Volcker Deflation," American Economic Review, American Economic Association, vol. 74(2), pages 211-215, May.
    9. Thomas J. Sargent, 1981. "Stopping moderate inflations: the methods of Poincaré and Thatcher," Working Papers 1, Federal Reserve Bank of Minneapolis.
    10. Phillip Cagan & William Fellner, 1983. "Tentative Lessons from the Recent Disinflationary Effort," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 603-610.
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    Cited by:

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    2. Mirza, Nawazish & Naqvi, Bushra & Rizvi, Syed Kumail Abbas & Umar, Muhammad, 2023. "Fiscal or monetary? Efficacy of regulatory regimes and energy trilemma of the inflation reduction act (IRA)," International Review of Financial Analysis, Elsevier, vol. 90(C).
    3. Tarkom, Augustine & Ujah, Nacasius U., 2023. "Inflation, interest rate, and firm efficiency: The impact of policy uncertainty," Journal of International Money and Finance, Elsevier, vol. 131(C).
    4. Sergey Narkevich & Pavel Trunin, 2012. "Reserve Currencies: Factors of Evolution and their Role in the World Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 162P.
    5. Ooft, Gavin, 2018. "Modelling and Forecasting Inflation for the Economy of Suriname," EconStor Preprints 215534, ZBW - Leibniz Information Centre for Economics.
    6. Atilla Gökçe & Umut Ãakmak, 2016. "Long-Term Relationship between Inflation and Public Sector Deficit in the Turkish Economy and its Macroeconomic Implications (1975-2014)," Journal of Economics and Behavioral Studies, AMH International, vol. 8(4), pages 109-122.
    7. Ooft, Gavin, 2020. "Forecasting Monthly Inflation: An Application To Suriname," Studies in Applied Economics 144, The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.

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    Keywords

    Monetary policy; Inflation (Finance);

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