Three Great American Disinflations

Michael Bordo (), Christopher John Erceg, Andrew Theo Levin () and Ryan Michaels ()
Additional contact information
Michael Bordo: Rutgers and Cambridge University, http://michael.bordo.googlepages.com/
Ryan Michaels: University of Michigan

No 2007/05, CFS Working Paper Series from Center for Financial Studies

Abstract: In this paper, we examine three famous episodes of deliberate deflation (or disinflation) in U.S. history, including episodes following the Civil War, World War I, and the Volcker disinflation of the early 1980s. These episodes were associated with widely divergent effects on the real economy, which we attribute both to differences in the policy actions undertaken, and to the transparency and credibility of the monetary authorities. We attempt to account for the salient features of each episode within the context of a stylized DSGE model. Our model simulations indicate how a more predictable policy of gradual deflation could have helped avoid the sharp post-WWI depression. But our analysis also suggests that the strong argument for gradualism under a transparent monetary regime becomes less persuasive if the monetary authority lacks credibility; in this case, an aggressive policy stance (as under Volcker) can play a useful signalling role by making a policy shift more apparent to private agents.

Keywords: DSGE Model; Credibility; Deflation (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac and nep-mon
Date: 2007-02-09
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Working Paper: Three Great American Disinflations (2007)
Working Paper: Three great American disinflations (2007)
Journal Article: Three great American disinflations (2007)
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