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Reading the recent monetary history of the United States, 1959-2007

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Author Info

  • Jesús Fernández-Villaverde
  • Pablo Guerrón-Quintana
  • Juan F. Rubio-Ramírez

Abstract

In this paper the authors report the results of the estimation of a rich dynamic stochastic general equilibrium (DSGE) model of the U.S. economy with both stochastic volatility and parameter drifting in the Taylor rule. They use the results of this estimation to examine the recent monetary history of the United States and to interpret, through this lens, the sources of the rise and fall of the Great Inflation from the late 1960s to the early 1980s and of the Great Moderation of business cycle fluctuations between 1984 and 2007. Their main findings are that, while there is strong evidence of changes in monetary policy during Chairman Paul Volcker's tenure at the Federal Reserve, those changes contributed little to the Great Moderation. Instead, changes in the volatility of structural shocks account for most of it. Also, although the authors find that monetary policy was different under Volcker, they do not find much evidence of a big difference in monetary policy among the tenures of Chairmen Arthur Burns, G. William Miller, and Alan Greenspan. The difference in aggregate outcomes across these periods is attributed to the time-varying volatility of shocks. The history for inflation is more nuanced, as a more vigorous stand against it would have reduced inflation in the 1970s, but not completely eliminated it. In addition, they find that volatile shocks (especially those related to aggregate demand) were important contributors to the Great Inflation.

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Bibliographic Info

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

Volume (Year): (2010)
Issue (Month): May ()
Pages: 311-338

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Handle: RePEc:fip:fedlrv:y:2010:i:may:p:311-338:n:v.92no.4

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Related research

Keywords: Monetary policy - United States ; Economic conditions - United States;

References

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  1. Nir Jaimovich & Henry E. Siu, 2007. "The Young, the Old, and the Restless: Demographics and Business Cycle Volatility," Discussion Papers 07-010, Stanford Institute for Economic Policy Research.
  2. Giorgio Primiceri & Alejandro Justiniano, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," 2006 Meeting Papers 353, Society for Economic Dynamics.
  3. Stacey L. Schreft, 1990. "Credit controls: 1980," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 25-55.
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Blog mentions

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  1. Mi educación sentimental en 10 (12) libros (II)
    by Cives in Politikon on 2012-05-20 21:27:41

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