An example of stagflation is when a government prints currency which would increase the money supply and create inflation , while raising taxes which would slow economic growth —resulting in stagflation. Louis Federal Reserve. Congress: Congressional Budget Office.
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Table of Contents Expand. What Is Stagflation? Understanding Stagflation. Stagflation Theories. Stagflation vs. Special Considerations. What causes stagflation? Why is stagflation bad? When conflicting expansionary and contractionary policies occur, it can slow growth while creating inflation.
That's stagflation. Stagflation got its name during the recession. There were five quarters when gross domestic product was negative. Inflation tripled in , rising from 3. How did this happen? Many experts blame the oil embargo. Prices quadrupled, triggering inflation in oil. The oil embargo alone wasn't enough to cause stagflation.
Instead, it was a combination of fiscal and monetary policy that created it. It started with a mild recession in GDP was negative for two quarters. Unemployment rose to 6. President Richard Nixon was running for re-election. He wanted to boost growth without triggering inflation.
On August 15, , he announced three fiscal policies. They got him re-elected. They also sowed the seeds for stagflation. A video of Nixon's speech shows the announcement of significant economic policy changes known as the Nixon Shock. The Nixon Shock was comprised of three actions that Nixon took.
Under Bretton Woods, most countries agreed to peg the value of their currencies to either the price of gold or the U. That had turned the dollar into a global currency. The United States didn't have that much gold in its reserves at Fort Knox. So Nixon stopped redeeming dollars for gold.
That sent the price of the precious metal skyrocketing and the value of the dollar plummeting which sent import prices up even more. These last two policies raised import prices, which slowed growth. Then growth slowed even more because U. Since they couldn't lower wages either, the only way to reduce costs was to lay off workers. That increased unemployment. Unemployment reduces consumer demand and slows economic growth. In other words, Nixon's three attempts to boost growth and control inflation had the opposite effect.
Learning the history of the gold standard will help you understand why the dollar then was backed by gold and why it isn't currently. The Federal Reserve's attempts to fight stagflation only worsened it. Between and , it raised the fed funds rate to fight inflation, then lowered it to fight the recession.
This "stop-go" monetary policy confused businesses. They kept prices high, even when the Fed lowered rates. That sent inflation up to But it was at a high cost. It created the recession. In , people became concerned about stagflation again.
They worried that the Fed's expansive monetary policies , used to rescue the economy from the financial crisis, would cause inflation. Stagflation of the s In the s, the US experienced a sharp rise in inflation due to the pressure of rising oil prices.
The inflation also led to rising unemployment as the post-war economic boom stalled. The stagflation was an important turning point for a few reasons. The post-war Keynesian consensus was challenged. Until the s, it seemed the government and Federal Reserve could manage the economic cycle. But, the s, saw a rise in both unemployment and inflation and it appeared traditional fiscal and monetary policy were unable to solve the twin problems.
The economic problems of the s, allowed monetarists like Milton Friedman to become more dominant and in the early s, the UK and US introduced monetarist policies seeking to tackle inflation as primary goal and ignore short-term costs of unemployment.
Related Supply-side shock Recessions. We use cookies on our website to collect relevant data to enhance your visit. Our partners, such as Google use cookies for ad personalization and measurement. However, you may visit "Cookie Settings" to provide a controlled consent.
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