By the early 1980s, there was a broad agreement on the primary causes of inflation. It was argued that while fluctuations in agricultural prices and oil price shocks did affect prices, sustained inflation since the early 1960s could not have occurred unless it was supported by the continuous excessive monetary expansion generated by the large-scale monetisation of the fiscal deficit 4 . 14.
For example, the rise in foreign productivity growth that I touched on earlier could work through several channels to narrow the U.S. trade deficit as funds were attracted abroad. Strong domestic demand among our trading partners would likely outweigh any drag resulting from appreciation of their currencies, while U.S. exports would benefit from both a change in relative prices and stronger foreign growth.