Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy

Giorgio Primiceri

No 11147, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper provides an explanation for the run-up of U.S. inflation in the 1960s and 1970s and the sharp disinflation in the early 1980s, which standard macroeconomic models have difficulties in addressing. I present a model in which rational policymakers learn about the behavior of the economy in real time and set stabilization policy optimally, conditional on their current beliefs. The steady state associated with the self-confirming equilibrium of the model is characterized by low inflation. However, prolonged episodes of high inflation ending with rapid disinflations can occur when policymakers underestimate both the natural rate of unemployment and the persistence of inflation in the Phillips curve. I estimate the model using likelihood methods. The estimation results show that the model accounts remarkably well for the evolution of policymakers' beliefs, stabilization policy and the postwar behavior of inflation and unemployment in the United States.

JEL-codes: E31 E32 E5 (search for similar items in EconPapers)
Date: 2005-02
New Economics Papers: this item is included in nep-mac and nep-mon
Note: ME
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Citations: View citations in EconPapers (95)

Published as Primiceri, Giorgio. “Why Inflation Rose and Fell: Policymakers’ Beliefs and US Postwar Stabilization Policy.” The Quarterly Journal of Economics 121 (August 2006): 867-901.

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Journal Article: Why Inflation Rose and Fell: Policy-Makers' Beliefs and U. S. Postwar Stabilization Policy (2006)
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