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The Great Inflation Drift

In: The Great Inflation: The Rebirth of Modern Central Banking

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  • Marvin Goodfriend
  • Robert G. King

Abstract

A standard statistical perspective on the U.S. Great Inflation is that it involves an increase in the stochastic trend rate of inflation, defined as the long-term forecast of inflation at each point in time. That perspective receives support from two sources: the behavior of long-term interest rates which are generally supposed to contain private sector forecasts, and statistical studies of U.S. inflation dynamics. We show that a textbook macroeconomic model delivers such a stochastic inflation trend, when there are shifts in the growth rate of capacity output, under two behavioral hypotheses about the central bank: (i) that it seeks to maintain output at capacity; and (ii) that it seeks to maintain continuity of the short-term interest rate. The theory then identifies major upswings in trend inflation with unexpectedly slow growth of capacity output. We interpret the rise of inflation in the U.S. from the perspective of this simple macroeconomic framework.

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This chapter was published in:

  • Michael D. Bordo & Athanasios Orphanides, 2013. "The Great Inflation: The Rebirth of Modern Central Banking," NBER Books, National Bureau of Economic Research, Inc, number bord08-1, octubre-d.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 9168.

    Handle: RePEc:nbr:nberch:9168

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    1. Mankiw, N Gregory & Miron, Jeffrey A & Weil, David N, 1987. "The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve," American Economic Review, American Economic Association, vol. 77(3), pages 358-74, June.
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    3. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184 National Bureau of Economic Research, Inc.
    4. Susanto Basu & John Fernald & Miles Kimball, 2004. "Are technology improvements contractionary?," Working Paper Series WP-04-20, Federal Reserve Bank of Chicago.
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    6. Michael Woodford, 2007. "How Important is Money in the Conduct of Monetary Policy?," NBER Working Papers 13325, National Bureau of Economic Research, Inc.
    7. Broadbent, Ben & Barro, Robert J., 1997. "Central bank preferences and macroeconomic equilibrium," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 17-43, June.
    8. Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc.
    9. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
    10. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, 02.
    11. Goodfriend, Marvin, 2002. "Monetary Policy in the New Neoclassical Synthesis: A Primer," International Finance, Wiley Blackwell, vol. 5(2), pages 165-91, Summer.
    12. Refet S. G├╝rkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
    13. Poole, William, 1991. "Interest rates and the conduct of monetary policy : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 31-39, January.
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    Cited by:
    1. Rochelle M. Edge & Refet S. Gurkaynak, 2011. "How useful are estimated DSGE model forecasts?," Finance and Economics Discussion Series 2011-11, Board of Governors of the Federal Reserve System (U.S.).
    2. Claudio Borio & Piti Disyatat & Mikael Juselius, 2014. "A parsimonious approach to incorporating economic information in measures of potential output," BIS Working Papers 442, Bank for International Settlements.
    3. Bhamra, Harjoat S. & Fisher, Adlai J. & Kuehn, Lars-Alexander, 2011. "Monetary policy and corporate default," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 480-494.

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