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The Great Inflation of the 1970s

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  • FABRICE COLLARD
  • HARRIS DELLAS

Abstract

The two leading explanations for the poor inflation performance during the 1970s are policy opportunism (Barro and Gordon 1983) and "inadvertently" bad monetary policy (Clarida, Gali, and Gertler 2000, Orphanides 2003). The main models of the latter category are that of Orphanides (loose monetary policy was the outcome of mis-perceptions about potential output rather than of inflation tolerance) and of Clarida, Gali, and Gertler (weak policy reaction to expected inflation led to indeterminacies). We show that both of these models can account for high and persistent inflation and also have satisfactory overall performance if an exceptionally large decrease in productivity took place at that time. Copyright 2007 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 39 (2007)
Issue (Month): 2-3 (03)
Pages: 713-731

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Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:2-3:p:713-731

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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References

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  1. Svensson, Lars E. O. & Woodford, Michael, 2000. "Indicator variables for optimal policy," Working Paper Series 0012, European Central Bank.
  2. Cukierman, Alex & Lippi, Francesco, 2005. "Endogenous monetary policy with unobserved potential output," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1951-1983, November.
  3. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  4. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  5. Michael Ehrmann and Frank Smets, 2001. "Uncertain Potential Output: Implications for Monetary Policy," Computing in Economics and Finance 2001 8, Society for Computational Economics.
  6. Athanasios Orphanides & John C. Williams, 2002. "Imperfect knowledge, inflation expectations, and monetary policy," Working Paper Series 2002-04, Federal Reserve Bank of San Francisco.
  7. Orphanides, Athanasios, 2004. "Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 151-75, April.
  8. James Bullard & Stefano Eusepi, 2003. "Did the Great Inflation occur despite policymaker commitment to a Taylor rule?," Working Paper 2003-20, Federal Reserve Bank of Atlanta.
  9. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May.
  10. Ireland, Peter N., 1999. "Does the time-consistency problem explain the behavior of inflation in the United States?," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 279-291, October.
  11. Nelson, Edward & Nikolov, Kalin, 2002. "Monetary Policy and Stagflation in the UK," CEPR Discussion Papers 3458, C.E.P.R. Discussion Papers.
  12. Orphanides, Athanasios, 1999. "The Quest for Prosperity Without Inflation," Working Paper Series 93, Sveriges Riksbank (Central Bank of Sweden).
  13. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
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Cited by:
  1. Sharon Kozicki & P.A. Tinsley, 2007. "Perhaps the FOMC Did What It Said It Did: An Alternative Interpretation of the Great Inflation," Working Papers 07-19, Bank of Canada.
  2. Collard, Fabrice & Dellas, Harris, 2004. "The New Keynesian Model with Imperfect Information and Learning," IDEI Working Papers 273, Institut d'Économie Industrielle (IDEI), Toulouse.

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