Is Reducing Inflation Good for an Economy?
Research By Peter Henry Assistant Professor of Economics Stanford Graduate School of Business One need look no further than Federal Reserve Chairman Alan Greenspan’s use of interest rates to manage the stock market and the economy to realize that expectations play a key role in economic well-being. In recent years, economists have learned a great deal about how interest rates can help keep inflation at bay. Now, Stanford Business School economist Peter Henry has marshaled more evidence in support of the view that expectations matter and that inflation can be successfully managed. But it wasn’t so long ago-when double-digit inflation haunted the U.S. economy in the early 1980s-that traditional economists thought that any effort to reduce inflation would inevitably cause a recession. The thinking was that if they raised interest rates in order to bring down inflation, there would be a high cost to pay in terms of slower economic growth. Companies would suffer losses; unemployment would i