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Monday DeLong Smackdown Watch: When Were Expectations of Inflation Forward-Looking? Weblogging

Robert Waldmann:

"Possibly", OK. "Plausibly", no way.

There was the mother of all policy shifts when Volcker replaced Miller (and no way to doubt V's determination by 1982 or so).

But expected inflation remained high for years. There were years and years when surveys expected increases in inflation which never came. Expected inflation was higher than lagged inflation, while in actuality inflation was decreasing due to ruthless monetary policy.

There have been times and places where the hypothesis of forward-looking inflation expectations has been plausible.

But the USA has never been one of those places.


Just to set the historical record straight: Inflation in France topped under the previous (conservative) administration that Mitterands' election threw into opposition. Inflation fell throughout Mitterands first term from 13.4% to 2.7% (see, even though there were devaluations of the FRF against the DEM (inside what later would become known as the ERM).

Of course any economic historian will remember that the second oil shock linked to the Iranian Revolution took place in 1979-1980 and was rather instrumental for inflationary trends on the one hand, and that the conservative government in France led by R. Barre in the late seventies had abolished price controls on most things.

What Mitterand's election in May 1981 did produce was not inflation, it was instant massive capital flight, which in turn led to a serious current account financing problem by the summer of 1981 as forex reserves collapsed, and that was the immediate reason for the devaluation and the imposition of capital controls. The capital flight of course was linked to political fears as the first socialist administration involved a number of Ministers from the communist party - four as I recall, mostly in junior positions - and a number of industries (mostly banks) were to be nationalised.

Amusingly given the general views expressed on this blog, the stylized political facts would be that socialist administrations in France are good for low inflation (and deficits) and conservative administrations not so much. Are US Republicans indeed the party of low public deficits? Just saying. Some memes do enjoy a 28000 years half-life.