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A New Look at Historical Monetary Policy and the Great Inflation through the Lens of a Persistence-Dependent Policy Rule

Richard Ashley (), Kwok Ping Tsang () and Randal Verbrugge ()

No 201814R, Working Papers from Federal Reserve Bank of Cleveland

Abstract: The origins of the Great Inflation, a central 20th century U.S. macroeconomic event, remain contested. Prominent explanations are poor forecasts or deficient activity gap estimates. An alternative view: the FOMC was unwilling to fight inflation, perhaps due to political pressures. Our findings, based on a novel approach, support the latter view. New econometric tools allow us to credibly identify the particular activity gap, if any, in use. Persistence-dependent unemployment (gap) responses in the 1970s were essentially the same pre- and post-Volcker. Conversely, FOMC behavior vis--vis inflation?also persistence-dependent?changed markedly starting with Volcker, consistent with (though not proving) the political pressures view.

Keywords: Persistence Dependence; Great Inflation; Intermediate Target; Taylor Rule; Natural Rate (search for similar items in EconPapers)
JEL-codes: C22 C32 E52 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2019-07-18
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac and nep-mon
Note: Revision of a paper published in October of 2018 titled "All Fluctuations Are Not Created Equal: The Differential Roles of Transitory versus Persistent Changes in Driving Historical Monetary Policy" 18-14
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Journal Article: A new look at historical monetary policy (and the great inflation) through the lens of a persistence-dependent policy rule (2020) Downloads
Working Paper: All Fluctuations Are Not Created Equal: The Differential Roles of Transitory versus Persistent Changes in Driving Historical Monetary Policy (2018) Downloads
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DOI: 10.26509/frbc-wp-201814r

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