Comments and Discussion.

This article provides information on the analysis of cost and price trends by Charles Schultze which gives great significance to the inertia of an inflation norm originating in the past experience of market participants. This inflation norm has characteristics of a rule of thumb or convention. Aside from factors that may be regarded as exogenous, the price level is viewed as dependent on the size of this inflation norm and on the level of "real" activity. The influence of the level of activity can be seen in the fact that keeping real activity supernormal by the standards of an economy raises the price level, though it causes no acceleration as long as the inert inflation norm remains unchanged, and keeping the level of activity subnormal reduces the price level, though it causes no deceleration as long as the inert inflation norm remains unchanged. Schultze states that, in contrast to the experience of the 1960s, the inflations brought about by the two world wars did not break the earlier convention of the small and inert inflation norm because these inflationary times were regarded as atypical events. But he should have added the Korean inflationary explosion as a third illustration under the same heading, but regardless of whether two or three instances are included, the essential point is that at those times the authorities succeeded in convincing he public that in postwar periods they would not continue to accommodate inflation, and therefore no extended period of underutilization was needed to prevent a large inflation norm from becoming incorporated into postwar market practices. These events do fall in place for the hypothesis suggesting the effect of credible policy postures on expectations but not for the hypothesis of the inert inflation norm.