Editing Inflation (section)

==== Keynes and the early Keynesians ====
{{further|Keynesian Revolution}}
{{further|Keynes's theory of wages and prices}}
John Maynard Keynes in his 1936 main work ''[[The General Theory of Employment, Interest and Money]]'' emphasized that wages and prices were [[Nominal rigidity|sticky]] in the short run, but gradually responded to [[aggregate demand]] shocks. These could arise from many different sources, e.g. autonomous movements in investment or fluctuations in private wealth or interest rates.<ref name=parkin/> Economic policy could also affect demand, [[monetary policy]] by affecting interest rates and [[fiscal policy]] either directly through the level of [[government final consumption expenditure]] or indirectly by changing [[Disposable and discretionary income|disposable income]] via tax changes.

The various sources of variations in aggregate demand will cause cycles in both output and price levels. Initially, a demand change will primarily affect output because of the price stickiness, but eventually prices and wages will adjust to reflect the change in demand. Consequently, movements in real output and prices will be positively, but not strongly, correlated.<ref name=parkin/>

Keynes' propositions formed the basis of [[Keynesian economics]] which came to dominate macroeconomic research and economic policy in the first decades after World War II.<ref name=Blanchard/>{{rp|526}} Other Keynesian economists developed and reformed several of Keynes' ideas. Importantly, [[William Phillips (economist)|Alban William Phillips]] in 1958 published indirect evidence of a negative relation between inflation and unemployment, confirming the Keynesian emphasis on a positive correlation between increases in real output (normally accompanied by a fall in unemployment) and rising prices, i.e. inflation. Phillips' findings were confirmed by other empirical analyses and became known as a [[Phillips curve]]. It quickly became central to macroeconomic thinking, apparently offering a stable trade-off between [[price stability]] and employment. The curve was interpreted to imply that a country could achieve low unemployment if it were willing to tolerate a higher inflation rate or vice versa.<ref name=Blanchard/>{{rp|173}}

The Phillips curve model described the U.S. experience well in the 1960s, but failed to describe the [[1973–75 recession|stagflation experienced in the 1970s]].