The Case for Gradualism in Policies to Reduce Inflation

Inflation is usually defined as a sustained rate of increase in a broadly based index of prices. Whatever meaning one gives to the imprecise term sustained, the past fifteen years seem to meet the standard. Both the all—item consumer price index and the implicit GNP deflator have increased in every quarter since late 1965, and neither seems likely to reach a zero rate of change in the near future. Sustained inflation at the rates of recent years is rare, even if not unique, in the histories of developed economies. It seems useful, at a conference summarizing the lessons of the seventies and drawing implications for the eighties to look back on the path we have travelled and to explore the path we might take to restore price stability. I shall use the opportunity to discuss some of what has been learned about monetary policy. The list is a long one, particularly if we include propositions that once were known but later forgotten or rejected in the years of Keynesian orthodoxy, so I shall not attempt to be complete. Any long-term gain from ending inflation depends on a negative relation between inflation and real output. The most common reason for suspecting that a gain will occur is the observed association between inflation and changes in relative prices. See Cukierman (1979). The