Managing a New Policy Framework: Paul Volcker, the St. Louis Fed, and the 1979-82 War on Inflation

Kevin Kliesen and David Wheelock

No 2020-022, Working Papers from Federal Reserve Bank of St. Louis

Abstract: In October 1979, Federal Reserve Chairman Paul Volcker persuaded his FOMC colleagues to adopt a new policy framework that i) accepted responsibility for controlling inflation and ii) implemented new operating procedures to control the growth of monetary aggregates in an effort to restore price stability. These moves were strongly supported by monetarist-oriented economists, including the leadership and staff of the Federal Reserve Bank of St. Louis. The next three years saw inflation peak and then fall sharply, but also two recessions and considerable volatility in interest rates and money supply growth rates. This article reviews the episode through the lens of speeches and FOMC meeting statements of Volcker and St. Louis Fed president Lawrence Roos, and articles by Roos’ staff. The FOMC adopted monetarist principles to establish the Fed’s anti-inflation credibility but Volcker was willing to accept deviations of money growth from the FOMC’s targets, unlike Roos, who viewed the targets as sacrosanct. The FOMC abandoned monetary aggregates in October 1982, but preserved the Fed’s commitment to price stability. The episode illustrates how Volcker used a change in operating procedures to alter policy fundamentally, and later adapt the procedures to changed circumstances without abandoning the foundational features of the policy.

Keywords: monetarism; inflation; money supply; Federal Open Market Committee; monetary policy; recession (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 N22 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2020-07-23
New Economics Papers: this item is included in nep-cba, nep-his, nep-hpe, nep-mac and nep-mon
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Journal Article: Managing a New Policy Framework: Paul Volcker, the St. Louis Fed, and the 1979-82 War on Inflation (2021)
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DOI: 10.20955/wp.2020.022

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