But, at the present juncture, the question we should be asking ourselves is not so much “why have we returned to price stability?”, but rather “how did we lose it in the 1970s?”. One element of the explanation that comes immediately to mind is the misconception that there is a permanent trade-off between inflation and output.
We are indebted to academic research for showing that the attempts to exploit a trade-off between inflation and unemployment eventually only lead to higher inflation. It thus re-established a firm basis for the concept of the long-term neutrality of money. Indeed, this is a perfect example of an academic insight that has become a deep-seated principle of central banking.