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.
"This book illustrates Sargent's great curiosity and honesty. . . . [Here] the reader gets a lucid, penetrating inquiry into the "ifs and buts" of rational expectations (RE) and their implications for policy."--Peter Sinclair, The Times Higher Education Supplement
"A lucid, penetrating inquiry into the 'ifs and buts' of rational expectations and their implications for policy. . . . This book illustrates Sargent's great curiosity and honesty . . . A beautifully crafted, deep, and . . . very accessible work. . . . It deserves to be one of the century's most influential books on macroeconomics."--Peter Sinclair, Times Literary Supplement
"A path-breaking contribution. It shows new ways to analyze dynamic economics. It is a basic reference to understand--and develop--dynamic macroeconomic theory in the 21st century."--Ramon Marimon, Journal of Economic Literature
"A brilliant technical treatise that includes both new results and original synthesis. . . . The Conquest of American Inflation may help to fashion a new paradigm in macroeconomic analysis."--Ben Bernanke, Princeton University
"A very deep and very subtle piece of scholarship.... Sargent is most impressive in his ability to bring theoretical arguments to bear on the problem of distinguishing empirically between the two histories of postwar inflation."--Thomas F. Cooley, University of Rochester
"The Conquest of American Inflation is a fascinating document, marshalling sophisticated economic theory and econometrics to the task of explaining the past 50 years of U.S. monetary policy and its interaction with macroconomic activity. It will surely be widely cited and widely discussed."--Robert King, University of Virginia
"A fascinating study of a real-world phenomenon that uses ideas from recent theoretical work on bounded rationality. Brilliant and pathbreaking."--David Kreps, Stanford University
Table of Contents:
1 The Rise and Fall of U.S. Inflation 1
2 Ignoring the Lucas Critique 14
3 The Credibility Problem 20
4 Credible Government Policies 31
5 Adaptive Expectations (1950's) 50
6 Optimal Misspecified Beliefs 59
7 Self-Confirming Equilibria 68
8 Adaptive Expectations (1990's) 87
9 Econometric Policy Evaluation 122
10 Triumph or Vindication? 130
Author Index 145
Subject Index 147
Other Princeton books authored or coauthored by Thomas J. Sargent: