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The reform of October 1979: how it happened and why

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  • David E. Lindsey
  • Athanasios Orphanides
  • Robert H. Rasche

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): (2005)
Issue (Month): Mar ()
Pages: 187-236

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Handle: RePEc:fip:fedlrv:y:2005:i:mar:p:187-236:n:v.87no.2,pt.2

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Keywords: Monetary policy ; Federal Open Market Committee ; Federal Reserve System - History;

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References

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Citations

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Cited by:
  1. Beyer, Andreas & Gaspar, Vítor & Gerberding, Christina & Issing, Otmar, 2009. "Opting out of the great inflation: German monetary policy after the breakdown of Bretton Woods," Discussion Paper Series 1: Economic Studies 2009,12, Deutsche Bundesbank, Research Centre.
  2. Athanasios Orphanides, 2006. "The road to price stability," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2006-05, Board of Governors of the Federal Reserve System (U.S.).
  3. Marvin Goodfriend, 2007. "How the World Achieved Consensus on Monetary Policy," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 21(4), pages 47-68, Fall.
  4. Kevin Lee & James Morley & Kalvinder Shields, . "The Meta Taylor Rule," Discussion Papers 11/07, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  5. Athanasios Orphanides & John C. Williams, 2010. "Monetary Policy Mistakes and the Evolution of Inflation Expectations," Working Papers, Central Bank of Cyprus 2010-2, Central Bank of Cyprus.
  6. 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, Elsevier, vol. 61(C), pages 77-100.
  7. Hagedorn, Marcus, 2011. "Optimal disinflation in new Keynesian models," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(3), pages 248-261.
  8. 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, Federal Reserve Bank of St. Louis 2009-038, Federal Reserve Bank of St. Louis.

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