1
$\begingroup$

I am aware of the conventional reasons: demand push inflation due to much higher oil prices, and a continuation of a mild recession.

Looking for a clearer explanation than I have been able to find, especially wrt monetary policy (IE, printing money)

$\endgroup$
1
1
$\begingroup$

The 19702-73 inflation was a supply side shock, a negative supply shock to be specific. Because of the high oil prices, production cost of almost every rose sharply.

Since, this was the first time that such a shock was seen at such large scale it was mostly misunderstood and traditional short term policy tools i.e. easy monetary policy and fiscal stimulus were deployed. What had actually happened was since oil is such an essential part of production, not just the short term but the long term output or the potential output itself was affected and should have been revised. Because of the incorrect diagnosis and policy response, inflation got embedded into the long term expectations and hence it just went into a spiral.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.