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

Qazi Haque (), Nicolas Groshenny and Mark Weder ()

No 2019-06, School of Economics Working Papers from University of Adelaide, School of Economics

Abstract: The paper re-examines whether the Federal Reserves monetary policy was a source of instability during the Great Ination by estimating a sticky-price model with positive trend ination, commodity price shocks and sluggish real wages. Our estimation provides empirical evidence for substantial wage-rigidity and nds that the Federal Reserve responded aggressively to ination 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.

Keywords: Trend ination; Monetary policy; Great Ination; Cost-push shocks; Indeterminacy; Wage sluggishnes; Sequential Monte Carlo algorithm (search for similar items in EconPapers)
JEL-codes: E32 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-his, nep-mac and nep-mon
Date: 2019-06
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Working Paper: Do we really know that U.S. monetary policy was destabilizing in the 1970s? (2019) Downloads
Working Paper: Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s? (2019) Downloads
Working Paper: Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s? (2018) Downloads
Working Paper: Do we really know that US monetary policy was destabilizing in the 1970s? (2018) Downloads
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