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Type: Journal article
Title: Do we really know that US monetary policy was destabilizing in the 1970s?
Author: Haque, Q.
Groshenny, N.
Weder, M.
Citation: European Economic Review, 2021; 131(23):1-24
Publisher: Elsevier
Issue Date: 2021
ISSN: 0014-2921
Statement of
Qazi Haque, Nicolas Groshenny, Mark Weder
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: Trend Inflation; Monetary Policy; Great Inflation; Cost-Push Shocks; Indeterminacy; Wage Sluggishnes; Sequential Monte Carlo Algorithm
Rights: © 2020 Elsevier B.V. All rights reserved.
RMID: 0030093689
DOI: 10.1016/j.euroecorev.2020.103615
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Appears in Collections:Economics publications

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