This book offers a survey of the developments of inflation theory during the two decades 1960–80, developments that reflect the economic history of this period. The process of inflation began in the early 1960s in a moderate way, accelerated at the end of the decade, and reached a peak just before the world recession in 1973–74. Since then the inflation process seems to have lost its dynamics in most of the industrial countries; that is, inflation rates show a tendency to decrease. These events have stimulated economic theorizing and model building designed to shed some light on the inflation process as experienced by the Western countries in these two decades.

The beginning of the new debate in inflation theory can be characterized by the attempt to explain the inflation process as “causal”: Does inflation originate in the labor market or can it be explained by the rate of growth of the money supply? Later, with the acceleration of inflation, the emphasis shifted to explaining inflationary expectations. The treatment of expectations distinguishes the new inflation models from the traditional theory.

Since the end of the 1960s the widely accepted view based on the “neoclassical synthesis” (P. Samuelson) has been increasingly challenged. The consensus has disappeared. Two schools have emerged and they both emphasize the difference between their approaches: neo-Keynesian macroeconomics versus the monetarist approach. Neither school is homogeneous; both encompass a spectrum of views.