Commentary
The Volcker recession of 1981–82 crushed inflation out of the economy, and presented economists with a new challenge: Rather than high and rising inflation, their new dilemma was low and falling inflation.
This was a dilemma they were happy to have, and in fact, they took credit for it. They eventually labeled this period of not merely low inflation, but also, for a time, falling levels of unemployment—see bottom chart in Figure 1—as the “Great Moderation.” Volcker’s successor from 2006 till 2014, Ben Bernanke, waxed lyrical in October 2004, saying that:
The sources of the Great Moderation remain somewhat controversial, but … there is evidence for the view that improved control of inflation has contributed in important measure to this welcome change in the economy. Paul Volcker and his colleagues on the Federal Open Market Committee deserve enormous credit both for recognizing the crucial importance of achieving low and stable inflation and for the courage and perseverance with which they tackled America’s critical inflation problem….
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