Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s?

Qazi Haque, Nicolas Groshenny and Mark Weder

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

Abstract: The paper re-examines whether the Federal Reserve’s monetary policy was a source of instability during the Great Inflation by estimating a sticky-price model with positive trend inflation, commodity price shocks and sluggish real wages. Our estimation provides empirical evidence for substantial wage rigidity and finds that the Federal Reserve responded aggressively to inflation but negligibly to the output gap. In the presence of non-trivial real imperfections and well-identified commodity price-shocks, U.S. data prefers a determinate version of the New Keynesian model: monetary policy-induced indeterminacy and sunspots were not causes of macroeconomic instability during the pre-Volcker era. However, had the Federal Reserve in the Seventies followed the policy rule of the Volcker-Greenspan-Bernanke period, inflation volatility would have been lower by one third.

Keywords: Monetary policy; Trend inflation; Great Inflation; Cost-push shocks; Indeterminacy (search for similar items in EconPapers)
JEL-codes: E32 E52 E58 (search for similar items in EconPapers)
Pages: 74
Date: 2020-08-14
New Economics Papers: this item is included in nep-cba, nep-dge, nep-his, nep-mac and nep-mon
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https://repec.econ.au.dk/repec/afn/wp/20/wp20_10.pdf (application/pdf)

Related works:
Journal Article: Do we really know that U.S. monetary policy was destabilizing in the 1970s? (2021)
Working Paper: Do we really know that U.S. monetary policy was destabilizing in the 1970s? (2021)
Working Paper: Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s? (2019)
Working Paper: Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s? (2019)
Working Paper: Do we really know that U.S. monetary policy was destabilizing in the 1970s? (2019)
Working Paper: Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s? (2018)
Working Paper: Do we really know that US monetary policy was destabilizing in the 1970s? (2018)
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