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Asset Market Participation, Monetary Policy Rules, and the Great Inflation

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  • Florin O. Bilbiie

    (Paris School of Economics, Université Paris 1 Panthéon-Sorbonne, and CEPR)

  • Roland Straub

    (European Central Bank)

Abstract

This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s and their changes thereafter. In an otherwise conventional sticky-price model, standard aggregate demand logic is inverted at low enough asset market participation: interest rate increases become expansionary, and passive monetary policy ensures equilibrium determinacy and maximizes welfare. This suggests that Federal Reserve policy in the pre-Volcker era was better than conventional wisdom implies. We provide empirical evidence consistent with this hypothesis and study the relative merits of changes in structure and shocks for reproducing the conquest of the Great Inflation and the Great Moderation. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/REST_a_00254
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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 95 (2013)
Issue (Month): 2 (May)
Pages: 377-392

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Handle: RePEc:tpr:restat:v:95:y:2013:i:2:p:377-392

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Web page: http://mitpress.mit.edu/journals/

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Related research

Keywords: asset market participation; monetary policy rules; U.S. macroeconomic performance; Great Inflation; Great Moderation;

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References

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Citations

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Cited by:
  1. B. Hofmann & G. Peersman & R. Straub, 2010. "Time Variation in U.S. Wage Dynamics," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 10/691, Ghent University, Faculty of Economics and Business Administration.
  2. Barnett, Alina & Straub, Roland, 2008. "What drives U.S. current account fluctuations?," Working Paper Series 0959, European Central Bank.
  3. Bilbiie, Florin O. & Straub, Roland, 2012. "Changes in the output Euler equation and asset markets participation," Journal of Economic Dynamics and Control, Elsevier, vol. 36(11), pages 1659-1672.
  4. Canzoneri, Matthew & Cumby, Robert & Diba, Behzad & López-Salido, David, 2011. "The role of liquid government bonds in the great transformation of American monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 282-294, March.
  5. Bilbiie, Florin Ovidiu & Monacelli, Tommaso & Perotti, Roberto, 2012. "Public Debt and Redistribution with Borrowing Constraints," CEPR Discussion Papers 9088, C.E.P.R. Discussion Papers.

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