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J. Bradford DeLong
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When workers, firms, and investors lose confidence in a central bank's commitment to price stability, the expected inflation rate too rises. This shifts the aggregate supply curve upward. Such a loss of credibility looks exactly like a supply shock. The central bank can (a) expand the money supply to keep the upward shift in the aggregate supply curve from causing a recession, at the cost of higher inflation; or (b) keeping the loss of confidence from generating higher inflation by raising interest rates, creating deep recession. Neither alternative is appetizing. So central banks jealously guard their credibility as inflation-fighters. |
| The Dilemma of Stagflation |
Professor
of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
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