Sunday, August 14, 2011

An awkward excerpt from a Krugman text


At this link I found the page partly captured in the window below.

Upper left = search info.
Upper right = main paragraph.
Lower middle = more text.


My take-away from the Krugman page: In the late 1970s, early 1980s, the Federal Reserve tried controlling the quantity of money as the way to control inflation. But before long they gave up and went back to the old way: controlling interest rates to control inflation.

What the excerpt fails to point out is that the few brief years that the Fed watched money rather than interest rates are the same few years during which the roaring inflation of the 1970s was finally broken.

I find that very interesting. I'm thinking: Changing the interest rate is the small hammer. Controlling the quantity of money is the big hammer.

I put the one-and-one together myself. Maybe there is more to the story. I'll be looking to confirm it.

2 comments:

Jazzbumpa said...

What the excerpt fails to point out is that the few brief years that the Fed watched money rather than interest rates are the same few years during which the roaring inflation of the 1970s was finally broken.

I was thinking the same thing as I read it. According to FRED series CPIAUCSL, inflation topped 9.7% in Feb. '79, and didn't fall below again until Nov. '81.

But -- there were two great waves of inflation in the 70's. Taking 6% as the onset of high inflation, they ran from June, '73 to June, '76, peak at 12.3% in Nov, '74; and (arbitrarily) Feb. '78 to Aug. '82, peak 14.59%, Mar-Apr. '80.

The excerpt doesn't say when the flirtation with monetarism started. Who can say it didn't CAUSE the second great wave of inflation?

Then again, maybe shit just happens, and Fed policy is only whistling in the wind.

Yours in perpetual confusion,
JzB

Calgacus said...

The second big wave was the second oil shock, the fall of the Shah.