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Federal Reserve Bank of Cleveland
Working Papers
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
Randal 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-à-vis inflation—also persistence-dependent—changed markedly starting with Volcker, consistent with (though not proving) the political pressures view.


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Richard Ashley & Kwok Ping Tsang & Randal Verbrugge, A New Look at Historical Monetary Policy and the Great Inflation through the Lens of a Persistence-Dependent Policy Rule, Federal Reserve Bank of Cleveland, Working Papers 181401, 18 Jul 2019.
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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
JEL Classification:
Subject headings:
Keywords: Taylor Rule; Great Inflation; Intermediate Target; Natural Rate; Persistence Dependence
DOI: 10.26509/frbc-wp-201814r
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