Monetary Policy Neglect and the Great Inflation in Canada, Australia, And
Munich Personal RePEc Archive Monetary Policy Neglect and the Great Inflation in Canada, Australia, and New Zealand. Nelson, Edward 25 January 2005 Online at https://mpra.ub.uni-muenchen.de/822/ MPRA Paper No. 822, posted 14 Nov 2006 UTC Monetary Policy Neglect and the Great Inflation in Canada, Australia, and New Zealand∗ Edward Nelson Federal Reserve Bank of St. Louis This paper studies the Great Inflation in Canada, Australia, and New Zealand. Newspaper coverage and poli- cymakers’ statements are used to analyze the views on the inflation process that led to the 1970s macroeconomic poli- cies, and the different movement in each country away from 1970s views. I argue that to understand the course of policy in each country, it is crucial to use the monetary policy neglect hypothesis, which claims that the Great Inflation occurred be- cause policymakers delegated inflation control to nonmonetary devices. This hypothesis helps explain why, unlike Canada, Australia and New Zealand continued to suffer high inflation in the mid-1980s. The delayed disinflation in these countries reflected the continuing importance accorded to nonmonetary views of inflation. JEL Codes: E31, E52, E58, E64 Christiano and Gust (2000, 21) observe that the Great Inflation of the 1970s took place in many countries and note the desirability of “understanding why it happened and what can be done to prevent ∗ I thank Jason Buol for research assistance; the editor; two anonymous refer- ees; David Archer, Guy Debelle, and Ozer¨ Karagedikli for comments on an earlier draft; and Lurlene Campbell, Wayne Carter, Elizabeth Dooley, Deirdre Hanlon, David Laidler, D.
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