Home About Latest Browse RSS Advanced Search

Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Three great American disinflations
Michael D. Bordo
Christopher J. Erceg
Andrew T. Levin
Ryan Michaels
Abstract

This paper analyzes the role of transparency and credibility in accounting for the widely divergent macroeconomic effects of three episodes of deliberate monetary contraction: the post-Civil War deflation, the post-WWI deflation, and the Volcker disinflation. Using a dynamic general equilibrium model in which private agents use optimal filtering to infer the central bank's nominal anchor, we demonstrate that the salient features of these three historical episodes can be explained by differences in the design and transparency of monetary policy, even without any time variation in economic structure or model parameters. For a policy regime with relatively high credibility, our analysis highlights the benefits of a gradualist approach (as in the 1870s) rather than a sudden change in policy (as in 1920-21). In contrast, for a policy institution with relatively low credibility (such as the Federal Reserve in late 1980), an aggressive policy stance can play an important signalling role by making the policy shift more evident to private agents.


Download Full text
Download Full text
Cite this item
Michael D. Bordo & Christopher J. Erceg & Andrew T. Levin & Ryan Michaels, Three great American disinflations, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 898, 2007.
More from this series
JEL Classification:
Subject headings:
Keywords: Monetary policy - United States ; Deflation (Finance)
For corrections, contact Ryan Wolfslayer ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal