How Stagflation Changed Monetary Policy

Published March 1, 2021

During the 1950s and 1960s, the Keynesian interpretation of monetary policy appeared to be correct. But stagflation in the 1970s ran contrary to the Keynesian model, which did not predict simultaneous high unemployment and inflation. As a result, new attitudes toward monetary policy were developed.

1. What was the source of high inflation and high unemployment in the 1970s?
2. Why is monetary policy important for the economy?

Additional Resources

• Watch as Milton Friedman discusses monetary policy. Available here.
• Watch “Monetary Policy: Rules vs. Discretion,” with John Taylor. Available here.
• Watch “Understanding Monetary Policy,” with John Taylor. Available here.
• Watch “National and International Monetary Reform,” with John Taylor. Available here.