In both cases, bringing inflation back down required high interest rates and was associated with a deep recession and a rise in the unemployment rate of at least 5 percentage points. The high unemployment then persisted for years and left deep scars in the labour market and damaged our communities. It was very costly.
Somewhat ironically, the problem today is that inflation is too low, which has contributed to the claim that central bank independence, and particularly inflation targeting, is the solution to yesterday's problem. Certainly, up until 2007, the low inflation outcomes did not come at the cost of inferior outcomes in terms of output or employment. This was Mervyn's ‘nice’ decade.