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Rational Expectations and Inflation$
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Thomas J. Sargent

Print publication date: 2013

Print ISBN-13: 9780691158709

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691158709.001.0001

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Stopping Moderate Inflations: The Methods of Poincaré and Thatcher

Stopping Moderate Inflations: The Methods of Poincaré and Thatcher

(p.111) 4 Stopping Moderate Inflations: The Methods of Poincaré and Thatcher
Rational Expectations and Inflation

Thomas J. Sargent

Princeton University Press

This chapter examines the methods adopted by British Prime Minister Margaret Thatcher and her French counterpart Raymond Poincaré to reduce the rate of inflation. Advocates of the two main groups of contemporary theories about inflation dynamics could have told Mrs. Thatcher that achieving that goal would be difficult. The first group consists of the “momentum” or “core inflation” theories, while the second group comprises the rational expectations-equilibrium theories. The chapter first provides an overview of the so-called Poincaré miracle before discussing Mrs. Thatcher's plan. It then considers the nature of the British government deficit, along with Britain's prospective revenues from North Sea oil that coincided with a simultaneous appreciation of the pound sterling. Finally, it compares Mrs. Thatcher's policies with respect to the coordination of monetary and fiscal policy with those of U.S. President Ronald Reagan.

Keywords:   inflation, Margaret Thatcher, Raymond Poincaré, momentum, rational expectations, Poincaré miracle, government deficit, monetary policy, fiscal policy, Ronald Reagan

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