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Improvements in Macroeconomic Stability: The Role of Wages and Prices

In: The American Business Cycle: Continuity and Change

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  • John B. Taylor

Abstract

This paper compares macroeconomic performance in the United States from 1891 through 1914 with the period after the Second World War by estimating reduced form autoregressions for prices, wages and output, by looking at their moving average representations, and by giving them simple structural interpretations. The results show that the impulses to the economic system were smaller in the later period, but the propagation mechanisms are much slower and more drawn out. The smaller shocks are therefore translated into larger and more prolonged fluctuations in output and inflation than would occur if the earlier dynamics were applicable in the later period. A tentative explanation for the changes in the dynamics is a slower speed of wage and price adjustment combined with a different accommodative stance for the monetary system.

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This chapter was published in:

  • Robert J. Gordon, 1986. "The American Business Cycle: Continuity and Change," NBER Books, National Bureau of Economic Research, Inc, number gord86-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10033.

    Handle: RePEc:nbr:nberch:10033

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    2. Taylor, John B., 1980. "Output and price stability: An international comparison," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 109-132, May.
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    Citations

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    Cited by:
    1. Allen, Steven G, 1992. "Changes in the Cyclical Sensitivity of Wages in the United States, 1891-1987," American Economic Review, American Economic Association, vol. 82(1), pages 122-40, March.
    2. Ellis, Christopher J. & Holden, Steinar, 1997. "Optimal contract length in a reputational model of monetary policy," European Economic Review, Elsevier, vol. 41(2), pages 227-243, February.
    3. John Hassler & Petter Lundvik & Torsten Persson & Paul Soderlind, 1992. "The Swedish business cycle: stylized facts over 130 years," Discussion Paper / Institute for Empirical Macroeconomics 63, Federal Reserve Bank of Minneapolis.
    4. Edward Nelson, 2008. "Friedman and Taylor on monetary policy rules: a comparison," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 95-116.
    5. Olivier J. Blanchard, 1986. "Empirical Structural Evidence On Wages, Prices and Employment in the US," Working papers 431, Massachusetts Institute of Technology (MIT), Department of Economics.
    6. Nathan S. Balke & Robert J. Gordon, 1986. "The Estimation of Prewar GNP Volatility, 1869-1938," NBER Working Papers 1999, National Bureau of Economic Research, Inc.
    7. Neville Francis & Valerie A. Ramey, 2004. "The Source of Historical Economic Fluctuations: An Analysis using Long-Run Restrictions," NBER Working Papers 10631, National Bureau of Economic Research, Inc.
    8. Magda Kandil, 2002. "Asymmetry In Economic Fluctuations In The Us Economy: The Pre-War And The 1946-1991 Periods Compared," International Economic Journal, Taylor & Francis Journals, vol. 16(1), pages 21-42.
    9. Selgin, George & Lastrapes, William D. & White, Lawrence H., 2012. "Has the Fed been a failure?," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 569-596.
    10. Kearney, Colm & Daly, Kevin, 1997. "Monetary volatility and real output volatility: An empirical model of the financial transmission mechanism in Australia," International Review of Financial Analysis, Elsevier, vol. 6(2), pages 77-95.
    11. Joseph E. Gagnon, 1989. "A forward-looking multicountry model: MX3," International Finance Discussion Papers 359, Board of Governors of the Federal Reserve System (U.S.).
    12. Victor Zarnowitz, 1989. "Cost and Price Movements in Business Cycle Theories and Experience: Causes and Effects of OBserved Changes (SEE ALSO WP3131-Send out together)," NBER Working Papers 3132, National Bureau of Economic Research, Inc.

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