World Development Report 1984

Box 2.2 Comparisons between the 1930s and the 1980s
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age point reduction in the rate of inflation. This not anticipated, the result was the worst recession
problem is then superimposed on the real-price since the 1930s (see Box 2.2).
rigidities, which have generated longstanding ten- Although disinflation was a major reason for the
dencies toward underemployment of resources. rise in real interest rates-especially short-term
A second factor is the degree to which the gov- rates-it was probably not the only one. With
ernment's commitment to reduce inflation is credi- growing budget deficits in the United States and in
ble. If people do not believe that the authorities several European countries, and with the decline
will do what they say, they can be convinced only in the surplus of oil-exporting countries after 1980,
by experience. The more deeply rooted is their dis- the supply of real savings also declined. This itself
belief, the more protracted and painful their expe- would be expected to lead to a rise in real interest
rience may need to be. Thus, if the extent and rates, other things being equal.
persistence of the monetary tightening had been Savings rates in the industrial countries peaked
fully anticipated, nominal interest rates would in 1973 when net savings rates were 14.1 percent of
have declined as inflation declined. Since it was GDP. Since then net savings rates have hovered in
20
;........,