The great inflation and early disinflation in Japan and Germany

This paper considers the Great Inflation of the 1970s in Japan and Germany. From 1975 onward, these countries had low inflation relative to other large economies. Traditionally, this success is attributed to stronger discipline on the part of Japan and Germany’s monetary authorities—for example, more willingness to accept temporary unemployment, or greater determination not to monetize government deficits. I instead attribute the success of these countries from the mid-1970s to their governments’ and monetary authorities’ acceptance that inflation is a monetary phenomenon. Likewise their higher inflation in the first half of the 1970s is attributable to the fact that their policymakers over this period embraced nonmonetary theories of inflation.