The great inflation of the 1970s

Fabrice Collard () and Harris Dellas

No 336, Working Paper Series from European Central Bank

Abstract: Was the high inflation of the 1970s mostly due to incomplete information about the structure of the economy (an unavoidable mistake as suggested by Orphanides, 2000)? Or, to weak reaction to expected inflation and/or excessive policy activism that led to indeterminacies (a policy mistake, a scenario suggested by Clarida, Gali and Gertler, 2000)? We study this question within the NNS model with policy commitment and imperfect information, requiring that the model have satisfactory overall empirical performance. We find that both explanations do a good job in accounting for the great inflation. Even with the commonly used specification of the interest policy rule, high and persistent inflation can occur following a significant productivity slowdown if policymakers significantly and persistently underestimate ”core” inflation.

Keywords: Inflation; imperfect information; Kalman filter; policy rule; indeterminacy. (search for similar items in EconPapers)
JEL-codes: 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: 2004-04
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Related works:
Working Paper: The Great Inflation of the 1970s (2004)
Journal Article: The great inflation of the 1970s (2003)
Journal Article: The Great Inflation of the 1970s (2007)
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