Commentary
In the late 1960s
Edmund Phelps and Milton Friedman challenged the popular view that there can be a sustainable trade-off between inflation and unemployment. In fact, over time, according to Phelps and Friedman, loose
central bank policies set the platform for lower economic growth and a higher rate of inflation, or stagflation.
Phelps and Friedman’s Explanation of Stagflation
Starting from a situation of equality between the current and the expected rate of inflation, the central bank decides to boost the rate of economic growth by raising the growth rate of money supply. As a result, a greater supply of money enters the economy, and each individual now has more money at his disposal.
