THE COST OF REDUCING INFLATION

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THE COST OF REDUCING INFLATION

In October 1979, as OPEC was imposing adverse supply shocks on the world’s economies for the second time in a decade, Fed Chairman Paul Volcker decided that the time for action bad come. Volcker bad been appointed chairman by President Carter only two months earlier, and be bad taken the job knowing that inflation had reached unacceptable levels. As guardian of the nation’s monetary system, he felt he had little choice but to pursue a policy of disinflation-a reduction in the rate of inflation. Volcker had no doubt that the Fed could reduce inflation through its ability to control the quantity of money. But what would be the short-run cost of disinflation? The answer to this question was much less certain,

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THE COST OF REDUCING INFLATION