Explaining Postwar Inflation Trends: An Exposition and Extension of Some Recent Research

The purpose of this paper is to exposit and extend some recent work, by numerous economists, on postwar inflation trends. Section I describes some of the empirical regularities that have been detected in postwar inflationary experience. Section II attempts to explain there regularities in the case of countries that have either failed to maintain stable exchange rates or have had their exchange rates pegged mainly by foreign (rather than domestic) central bank intervention in international currency markets. An example of the former kind of country in Argentina, and the prime example of the letter in the United States. Section III considers the other kind of country, namely, those with central banks that have maintained fairly rigid exchange rates. Section IV concludes the main text with comments on policy implications and promising directions for future research. The Appendix consists of a mathematical elaboration of ideas presented diagrammatically in Section II. For completeness, this paper contains a substantial amount of received theory. There is original material too, namely, some new data-processing exercises (see Sections I and III), a modification of Mundell’s (1972) analysis of the dollar stand with a zero rate of time preference (Appendix).