What Went Wrong?

Abstract

Failure to stop war-induced inflation is traced to: (1) higher tax rates inducing higher government expenditures; (2) limitations of countercyclical tax changes predictable from the permanent-income hypothesis; (3) perverse effects of certain tax changes on investment demand; (4) tax increases, especially but not exclusively of the excise variety, which raise prices by reducing supply; (5) a liquidity leak, analogous to the liquidity trap, which sharply limits the impact of tight money; (6) inelastic interest-rate expectations which limit real long-term movements, while permanent changes in long rates rule out intertemporal substitution effects; (7) the cost element in higher interest charges, which raises supply prices; (8) possibly decreasing elasticity of lower demand in an imperfectly competitive world; and (9) lags which may be variable as well as long.