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Federal Reserve credibility and inflation scares

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  • Chan G. Huh
  • Kevin J. Lansing

Abstract

We develop a simple, quantitative model of the U.S. economy to demonstrate how an "inflation scare " may occur when the Federal Reserve lacks full credibility. In particular, we show that the long-term nominal interest rate may undergo a sudden increase if an adverse movement in the inflation rate triggers a deterioration in the public's beliefs about the Federal Reserve's commitment to maintaining low inflation in the future. We find that simulations from our model capture some observed patterns of U.S. interest rates in the 1980s.

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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (1998)
Issue (Month): ()
Pages: 3-16

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Handle: RePEc:fip:fedfer:y:1998:p:3-16:n:2

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Keywords: Inflation (Finance) ; Interest rates ; Monetary policy - United States;

References

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  1. Laurence Ball, 1992. "Disinflation With Imperfect Credibility," NBER Working Papers 3983, National Bureau of Economic Research, Inc.
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  3. D. Backus & J. Driffil, 1998. "Inflation and Reputation," Levine's Working Paper Archive 625, David K. Levine.
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Citations

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Cited by:
  1. Huh, Chan G. & Lansing, Kevin J., 2000. "Expectations, credibility, and disinflation in a small macroeconomic model," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 51-86.
  2. Michael Dueker, 1999. "Measuring monetary policy inertia in target Fed funds rate changes," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 3-10.

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