The quest for prosperity without inflation
Athanasios Orphanides ()
No 15, Working Paper Series from European Central Bank
In recent years, activist monetary policy rules responding to inflation and the level of economic activity have been advanced as a means of achieving effective output stabilization without inflation. Advocates of such policies suggest that their flexibility may yield substantial stabilization benefits while avoiding the excesses of overzealous discretionary fine-tuning such as is thought to characterize the experience of the 1960s and 1970s. In this paper, I demonstrate that these conclusions are misguided. To illustrate this fact, I construct a database with data available to policymakers in real time from 1965 to 1993 and, using an estimated model, I perform counterfactual simulations under alternative informational assumptions regarding the knowledge policymakers can reasonably have had about the state of the economy when policy decisions were made. Using realistic informational assumptions overturns findings favoring activist policies in favor of prudent policies that ignore short-run stabilization concerns altogether. The evidence points to misperceptions of the economy's productive capacity as the primary underlying cause of the 1970s inflation and suggests that apparent differences in the framework governing monetary policy decisions during the 1970s compared to the more recent past have been greatly exaggerated. JEL Classification: E3, E52, E58
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (58) Track citations by RSS feed
Downloads: (external link)
Journal Article: The quest for prosperity without inflation (2003)
Working Paper: The Quest for Prosperity Without Inflation (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: http://EconPapers.repec.org/RePEc:ecb:ecbwps:20000015
Access Statistics for this paper
More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Series data maintained by Official Publications ().