Ben_Bernanke_s_70s_Show - FEBRUARY 5, 2011 Ben Bernanke's...

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FEBRUARY 5, 2011 Ben Bernanke's '70s Show Inflation is on the horizon, and now is the time for the Fed to head it off. By ALLAN H. MELTZER In the 1970s, despite rising inflation, members of the Federal Reserve's policy committee repeatedly chose to lower interest rates to reduce unemployment. Their Phillips Curve models, which charted an inverse relationship between unemployment and inflation, told them that inflation could wait and be addressed at a more opportune time. They were flummoxed when inflation and unemployment rose together throughout the decade. In 1979, shortly after becoming Fed chairman, Paul Volcker told a Sunday talk-show audience that reducing inflation was the best way to reduce unemployment. He abandoned the faulty Phillips Curve thinking that unemployment was the enemy of inflation. And he told the Fed's staff that while he thought highly of their work, he did not find their inflation forecasts useful. Instead of focusing on near-term output and employment, he changed the Fed's policy to put more emphasis on the longer-term reduction of inflation. That required a persistent policy that President Reagan supported even in the severe 1982 recession. We know the result: Inflation came down and stayed down. The Volcker disinflation ushered in two decades of low inflation and relatively steady growth, punctuated by a few short, mild recessions. And as Mr. Volcker predicted, the unemployment rate fell after
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This note was uploaded on 03/18/2011 for the course FIN 615 taught by Professor Yan during the Spring '11 term at New York Institute of Technology-Westbury.

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Ben_Bernanke_s_70s_Show - FEBRUARY 5, 2011 Ben Bernanke's...

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