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The Reform of October 1979: How It Happened and Why

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  • Lindsey, David E.

    (Board of Governors of the Federal Reserve System)

  • Orphanides, Athanasios

    (Board of Governors of the Federal Reserve System)

  • Rasche, Robert H.

    (Federal Reserve Bank of St. Louis)

Abstract

This study offers a historical review of the monetary policy reform of October 6, 1979, and discusses the influences behind it and its significance. We lay out the record from the start of 1979 through the spring of 1980, relying almost exclusively on contemporaneous sources, including the recently released transcripts of Federal Open Market Committee (FOMC) meetings during 1979. We then present and discuss in detail the reasons for the FOMC’s adoption of the reform and the communications challenge presented to the Committee during this period. Further, we examine whether the essential characteristics of the reform were consistent with monetarism; new, neo, or old-fashioned Keynesianism; nominal income targeting; and inflation targeting. The record suggests that the reform was adopted when the FOMC became convinced that its earlier gradualist strategy using finely tuned interest rate moves had proved inadequate for fighting inflation and reversing inflation expectations. The new plan had to break dramatically with established practice, allow for the possibility of substantial increases in short-term interest rates yet be politically acceptable, and convince financial market participants that it would be effective. The new operating procedures were also adopted for the pragmatic reason that they would likely succeed.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2013)
Issue (Month): Nov ()
Pages: 487-542

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Handle: RePEc:fip:fedlrv:00008

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Cited by:
  1. Kevin Lee, James Morley and Kalvinder Sheields, 2011. "The Meta Taylor Rule," Department of Economics - Working Papers Series 1131, The University of Melbourne.
  2. Beyer, Andreas & Gaspar, Vítor & Gerberding, Christina & Issing, Otmar, 2009. "Opting out of the Great Inflation: German monetary policy after the break down of Bretton Woods," Working Paper Series 1020, European Central Bank.
  3. Athanasios Orphanides & John Williams, 2011. "Monetary Policy Mistakes and the Evolution of Inflation Expectations," NBER Working Papers 17080, National Bureau of Economic Research, Inc.
  4. Marvin Goodfriend, 2007. "How the World Achieved Consensus on Monetary Policy," NBER Working Papers 13580, National Bureau of Economic Research, Inc.
  5. Athanasios Orphanides, 2006. "The Road to Price Stability," American Economic Review, American Economic Association, vol. 96(2), pages 178-181, May.
  6. Daniel L. Thornton, 2009. "How did we get to inflation targeting and where do we go now? a perspective from the U.S. experience," Working Papers 2009-038, Federal Reserve Bank of St. Louis.
  7. Ascari, Guido & Ropele, Tiziano, 2013. "Disinflation effects in a medium-scale New Keynesian model: Money supply rule versus interest rate rule," European Economic Review, Elsevier, vol. 61(C), pages 77-100.
  8. Hagedorn, Marcus, 2011. "Optimal disinflation in new Keynesian models," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 248-261.

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