Commentary: How Should Monetary Policy Respond to Shocks While Maintaining Long-Run Price Stability? —Conceptual Issues

John Taylor has produced a comprehensive and insightful paper. He begins by reviewing what he calls the “Great Inflation,” the period of the 1970s and early 1980s. Following Brad De Long’s observation that by the early 1970s, well before the oil shocks, baseline U.S. inflation was already in the 4 percent to 5 percent range, John Taylor rejects the hypothesis that the oil price shocks of the period were the main source of the rise of inflation. While De Long’s observation does suggest that shocks were not the sole source of the inflation of the 1970s, in my view, one cannot conclude that shocks were not important contributors to the inflation of the 1970s. Concurrent with shocks, the 4 percent to 5 percent inflation of the early 1970s accelerated to above 9 percent in the mid-1970s and again in the late 1970s and early 1980s. So I think it is reasonable to suggest that these oil price shocks, though not the sole source, were a significant contributor to the inflation of this period, both directly and especially indirectly through the interaction of shocks and policy mistakes. Shocks put policy under pressure and provide enhanced opportunities for policy mistakes. For example, the over-