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The Reform of October 1979: How it Happened and Why

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  • Lindsey, David E
  • Orphanides, Athanasios
  • Rasche, Robert H

Abstract

This study offers a historical review of the monetary policy reform of October 6, 1979, and discusses the influences behind it and its significance. We lay out the record from the start of 1979 through the spring of 1980, relying almost exclusively upon contemporaneous sources, including the recently released transcripts of Federal Open Market Committee (FOMC) meetings during 1979. We then present and discuss in detail the reasons for the FOMC’s adoption of the reform and the communications challenge presented to the Committee during this period. Further, we examine whether the essential characteristics of the reform were consistent with monetarism, new, neo, or old-fashioned Keynesianism, nominal income targeting, and inflation targeting. The record suggests that the reform was adopted when the FOMC became convinced that its earlier gradualist strategy using finely tuned interest rate moves had proved inadequate for fighting inflation and reversing inflation expectations. The new plan had to break dramatically with established practice, allow for the possibility of substantial increases in short-term interest rates, yet be politically acceptable, and convince financial markets participants that it would be effective. The new operating procedures were also adopted for the pragmatic reason that they would likely succeed.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4866.

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Date of creation: Jan 2005
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Handle: RePEc:cpr:ceprdp:4866

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Keywords: Federal Reserve; FOMC; monetary reform; operating procedures; Paul Volcker;

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References

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  1. P.A. Tinsley & P. von zur Muehlen & G. Fries, 1982. "The short-run volatility of money stock targeting," Special Studies Papers 169, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. Orphanides, Athanasios & Williams, John C, 2010. "Monetary Policy Mistakes and the Evolution of Inflation Expectations," CEPR Discussion Papers 7892, C.E.P.R. Discussion Papers.
  2. Ascari, Guido & Ropele, Tiziano, 2013. "Disinflation effects in a medium-scale New Keynesian model: Money supply rule versus interest rate rule," European Economic Review, Elsevier, vol. 61(C), pages 77-100.
  3. Beyer, Andreas & Gaspar, Vítor & Gerberding, Christina & Issing, Otmar, 2009. "Opting out of the great inflation: German monetary policy after the breakdown of Bretton Woods," Discussion Paper Series 1: Economic Studies 2009,12, Deutsche Bundesbank, Research Centre.
  4. Athanasios Orphanides, 2006. "The road to price stability," Finance and Economics Discussion Series 2006-05, Board of Governors of the Federal Reserve System (U.S.).
  5. Kevin Lee & James Morley & Kalvinder Shields, . "The Meta Taylor Rule," Discussion Papers 11/07, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  6. Marvin Goodfriend, 2007. "How the World Achieved Consensus on Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 47-68, Fall.
  7. Daniel L. Thornton, 2009. "How did we get to inflation targeting and where do we go now? a perspective from the U.S. experience," Working Papers 2009-038, Federal Reserve Bank of St. Louis.
  8. Hagedorn, Marcus, 2011. "Optimal disinflation in new Keynesian models," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 248-261.

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