COURSE: FIN405 (Management of Financial Institutions)

Section: 1

Term Paper on
The Great Inflation of 1980’s

Submitted To:
Kazi Umme Sumaiya, CFA
Date Of Submission: 26th March 2023

NAME ID

Fahad Alfi 2022139

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Letter of Transmittal

26th March 2023

Kazi Umme Sumaiya, CFA

Faculty Member

Independent University, Bangladesh (IUB)

Subject: Submission of Term Paper on the Great Inflation of 1980’s

Ma’am

With due respect, I would prefer to submit my individual assignment. I have taken assist
from websites which was a great help in my research.
Therefore, I sincerely hope that my assignment would meet to your respective requirements.
I would also want to thank you for the opportunity and the guidance you provided.
Sincerely,

Fahad Alfi
ID:2022139

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Contents
Letter of Transmittal...................................................................................................................................2
The Great Inflation of 1980’s......................................................................................................................4
Introduction:...............................................................................................................................................4
1. When did the crisis take place and what were the consequences?......................................................5
2. What were the key reasons behind the crisis?......................................................................................5
3. How the crisis was resolved?..................................................................................................................6
References..................................................................................................................................................7

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The Great Inflation of 1980’s

Introduction:

The 1980s Great Inflation was a period of excessive inflation that afflicted several countries
around the world. Inflation rates hit double digits during this period, posing substantial economic
concerns. The Great Inflation was caused by a variety of variables, including expansionary
monetary policies, oil price shocks, wage-price spirals, and structural problems. This period had
severe economic effects, including lower economic growth and more uncertainty for firms and
people. Governments and central banks around the world responded with anti-inflationary
policies such as restrictive monetary policy, fiscal austerity, and structural changes.

The lessons learnt from the 1980s Great Inflation continue to affect economic policy decisions
today, particularly in terms of inflation targeting and monetary policy.

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1. When did the crisis take place and what were the consequences?

The 1980s Great Inflation was a period of high inflation that impacted several countries
worldwide. In many regions, inflation rates hit double digits, posing huge economic concerns.
The crisis began in the 1970s, when inflation rates in several countries increased.
The Great Inflation had significant economic implications. Inflation reduces the purchasing
power of money, causing consumers and companies to pay more. This can result in reduced
investment, job losses, and social discontent. The 1980s' high inflation rates slowed economic
growth and raised uncertainty for firms and families.
In the United States, for example, inflation rates peaked at more than 13% in 1979 and stayed
above 5% for most of the decade. High inflation rates lead to stagflation, a period of economic
stagnation and increased unemployment. To control inflation, the Federal Reserve responded by
boosting interest rates to historically high levels.
In some nations, such as the United Kingdom, inflation rates rose even higher, peaking at more
than 20% in 1980. This resulted in substantial economic difficulties, such as rising
unemployment and social instability.
To battle high inflation rates, central banks around the world boosted interest rates to previously
unheard-of heights. This reduced inflation while also contributing to economic slowdowns and
increasing unemployment in several countries.
Overall, the Great Inflation of the 1980s was a significant economic crisis that had far-reaching
consequences for many countries around the world.
United Kingdom: Inflation in the United Kingdom was likewise significant in the 1980s,
reaching as high as 22% in 1980. To counteract inflation, the government imposed a series of
austerity measures, causing social unrest and political strife.

2. What were the key reasons behind the crisis?

A few reasons contributed to the Great Inflation of the 1980s, including:

1. Oil Price Increase: In the 1970s, the Organization of Petroleum Exporting Countries
(OPEC) increased the price of oil, producing a considerable increase in the cost of
production and transportation, resulting in higher prices for goods and services.

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 2. Expansionary Monetary Policy: In the 1970s, the Federal Reserve of the United States
used expansionary monetary policies to keep interest rates low while growing the money
supply, resulting in inflation.

3. Wage and Price Controls: To combat inflation in the early 1970s, the United States
enacted wage and price restrictions. These controls, however, skewed market signals and
undermined firm incentives to control costs.

4. Globalization: Increasing competition for resources and higher production costs because
of globalization led to the 1980s inflationary pressures.

3. How the crisis was resolved?

The 1980s Great Inflation was eventually resolved through a mix of monetary, fiscal, and
structural reforms.
 Monetary Policy: Under the direction of Paul Volcker, the United States Federal
Reserve conducted a restrictive monetary policy in the early 1980s, hiking interest rates
to combat inflation. This approach precipitated a recession in 1981-82, but it eventually
brought inflation under control.

 Fiscal Policy: The United States also pursued fiscal measures like as tax cuts and
increased defense spending, which aided economic development and reduced
unemployment.

 Structural changes were implemented in addition to monetary and fiscal policy to

address the underlying causes of inflation. Deregulation of businesses such as airlines and
trucking resulted in increased competition and cheaper costs.

 Global Factors: The mid-1980s oil price fall also had a role in getting inflation under
control. This resulted in lower production costs and lower prices for goods and services.

Ultimately, the combination of these measures and changes contributed to the containment of
inflation by the late 1980s.

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References

Darby, M. R. (1982). The US employment experience in the 1970s. Brookings Papers on

Economic Activity, 1982(2), 373-422. https://www.jstor.org/stable/2534436
Bordo, M. D. (1981). The contribution of oil-price shocks to the macroeconomic instability of
the 1970s. American Economic Review, 71(2), 229-235. https://www.jstor.org/stable/1802781
Orphanides, A. (2003). Monetary policy rules, macroeconomic stability, and inflation: A view
from the trenches. Journal of Money, Credit and Banking, 35(5), 787-808.
https://doi.org/10.1353/mcb.2003.0041