Working Paper

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

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;

JEL Classification: C22; C32; E52;

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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2019-07-18

Number: 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