Here’s Arnold Kling discussing the Great Inflation and its aftermath:
Let me throw a third hypothesis into the mix. There was a fair amount of money illusion in financial markets in the 1970s. That is, people looked at high nominal interest rates and thought that this would slow down inflation. In fact, interest rates were not high enough. Relative to financial markets, the Fed was following rather than leading. It was reflecting the views of Wall Street. Finally, in the early 1980s, the “bond market vigilantes” took over, and we had high real interest rates, high unemployment, and a slowdown in inflation. Just to be clear, I am giving the credit for high interest rates to the bond market vigilantes, not to Paul Volcker.
This is a good example of the problems associated with “reasoning from price change.” Kling is implicitly associating higher interest rates with contractionary policy. That might be true if the higher interest rates are caused by a contraction in the money supply (giving credit to Paul Volcker.) However in this case Kling is holding the money supply fixed and assuming the higher interest rates are caused by higher inflation expectations. In that case the higher interest rates will lead to higher nominal GDP growth and inflation, because higher nominal rates tend to increase velocity.
Note that this is not some sort of weird “market monetarist” result. Higher inflation expectations are also expansionary (or at least non-contractionary) in the new Keynesian model.
BTW, NGDP growth reached an annual rate of 19% in late 1980 and early 1981. Volcker is to blame for that surge.