Tuesday, October 25, 2005

The Phillips Curve and the Economy in the 1970s

Wall Street Journal Opinion Journal Political Diary (subscription required) October 25, 2005

Stephen Moore commenting on President Bush’s nomination of Ben Bernanke to replace Federal Reserve Chairman Alan Greenspan.

“He rejects the bankrupt Phillips Curve notion of a trade off between prosperity and price stability. In the 1970s, the Fed slavishly followed the Keynesian model of the Phillips Curve, which held that an unemployment rate below 6% was automatically inflationary. As growth stalled and unemployment rates soared in the mid and late 1970s, the Fed foolishly stoked the fires of inflation in order to spur more growth. We got less and less growth until the model utterly collapsed in 1980 when the economy sank into stagflation, with negative economic growth and double-digit inflation rates that led at one point to the infamous 20% mortgage interest rates.”


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