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BPEA Article

Relative Shocks, Relative Price Variability, and Inflation


THE COEXISTENCE of high inflation and low real growth has received its
share of attention in the attempts to understand the U.S. economic performance
of the 1970s. Analytic contributions in the imperfect information
market-clearing framework have shown how uncertainty about inflation
can reduce the efficiency of the price system and how relative price
variability is likely to be greater when there are unanticipated changes in
the price level. Such analyses, combined with the assumption that high
inflation rates are also more uncertain, provide a rationalization for the
view that inflation may itself be a factor explaining the poor performance
of the United States and other industrial economies after 1973.


Stanley Fischer

Vice Chairman of the Board of Governors of the Federal Reserve System


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