On the Costs and Benefits of Anti-Inflation Policies

A prominent policy issue of the 1970s and one that seems certain to dominate the early 1980s is the appropriate response to a prevailing high rate of inflation. The view that there is a long-run trade-off between inflation and unemployment, widely accepted at the end of the sixties, is now held by only a small minority of economists. It is still widely believed, however, that there is a short-run trade-off between inflation and unemployment, which implies that restrictive macroeconomic policies designed to reduce inflation would cause a temporary rise in the unemployment rate. Therefore, both the time pattern of the response of inflation and unemployment to demand management policies and the relative cost of inflation and unemployment remain dominant issues in the design of macroeconomic policy.