In the past fifteen years, inflation has been conquered by many advanced
countries. History reveals, however, that it has been conquered before
and returned. In The Conquest of American Inflation, Thomas J. Sargent
presents a groundbreaking analysis of the rise and fall of U.S.
inflation after 1960. He examines two broad explanations for the
behavior of inflation and unemployment in this period: the natural-rate
hypothesis joined to the Lucas critique and a more traditional
econometric policy evaluation modified to include adaptive expectations
and learning. His purpose is not only to determine which is the better
account, but also to codify for the benefit of the next generation the
economic forces that cause inflation.
Sargent begins with an explanation of how American policymakers
increased inflation in the early 1960s by following erroneous
assumptions about the exploitability of the Phillips curve--the inverse
relationship between inflation and unemployment. In subsequent chapters,
he connects a sequence of ideas--self-confirming equilibria,
least-squares and other adaptive or recursive learning algorithms,
convergence of least-squares learners with self-confirming equilibria,
and recurrent dynamics along escape routes from self-confirming
equilibria. Sargent synthesizes results from macroeconomics, game
theory, control theory, and other fields to extend both adaptive
expectations and rational expectations theory, and he compellingly
describes postwar inflation in terms of drifting coefficients. He
interprets his results in favor of adaptive expectations as the relevant
mechanism affecting inflation policy.
Providing an original methodological link between theoretical and policy
economics, this book will engender much debate and become an
indispensable text for academics, graduate students, and professional
economists.
