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

Author

Listed:
  • Richard Ashley
  • Kwok Ping Tsang
  • Randal J. Verbrugge
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.

Suggested Citation

  • Richard Ashley & Kwok Ping Tsang & Randal J. Verbrugge, 2019. "A New Look at Historical Monetary Policy and the Great Inflation through the Lens of a Persistence-Dependent Policy Rule," Working Papers 18-14R, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:181401
    DOI: 10.26509/frbc-wp-201814r
    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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    Cited by:

    1. Jean-Bernard Chatelain & Kirsten Ralf, 2020. "How macroeconomists lost control of stabilization policy: towards dark ages," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 27(6), pages 938-982, November.
    2. Verbrugge, Randal & Zaman, Saeed, 2023. "The hard road to a soft landing: Evidence from a (modestly) nonlinear structural model," Energy Economics, Elsevier, vol. 123(C).
    3. Randal Verbrugge & Saeed Zaman, 2024. "Post‐COVID inflation dynamics: Higher for longer," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(4), pages 871-893, July.
    4. Randal J. Verbrugge, 2021. "Is It Time to Reassess the Focal Role of Core PCE Inflation?," Working Papers 21-10, Federal Reserve Bank of Cleveland.

    More about this item

    Keywords

    Persistence Dependence; Great Inflation; Intermediate Target; Taylor Rule; Natural Rate;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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