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The nominal facts and the October 1979 policy change

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  • William T. Gavin
  • Finn E. Kydland

Abstract

Gavin and Kydland (1999) calculated the cyclical properties of money and prices for the periods before and after the October 1979 policy change. In this article, we extend that work by adding four more years of data and including a study of nominal interest rates and inflation. The adoption of a disinflation policy in October 1979 does not appear to have had a measurable impact on the cyclical properties of real variables. However, it made a dramatic difference in the cyclical properties of nominal variables. We also examine the covariance structure of several nominal relationships: the autocovariance of inflation, the lag from money growth to inflation, and lag from money growth to nominal GDP growth. Generally, the monetary policy in the early period allowed the average inflation rate to ratchet upward with each business cycle. This policy was associated with high variances, high autocorrelations, and high cross-correlations among nominal variables. The moderate inflation policy followed in the second period was associated with lower mean growth rates, less volatility, and lower cross-correlations between money growth and inflation.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2000-013.

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Date of creation: 2000
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Publication status: Published in Federal Reserve Bank of St. Louis Review, November/December 2000, 82(6), pp. 39-61
Handle: RePEc:fip:fedlwp:2000-013

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Keywords: Business cycles ; Monetary policy ; Inflation (Finance);

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References

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  1. Yash P. Mehra, 1999. "A forward-looking monetary policy reaction function," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 33-54.
  2. Stock, James H. & Watson, Mark W., 1999. "Business cycle fluctuations in us macroeconomic time series," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 1, pages 3-64 Elsevier.
  3. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
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  6. Bryan, Michael F. & Gavin, William T., 1994. "A different kind of money illusion: The case of long and variable lags," Journal of Policy Modeling, Elsevier, vol. 16(5), pages 529-540, October.
  7. Richard G. Anderson & Robert H. Rasche, 1996. "A revised measure of the St. Louis adjusted monetary base," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 3-13.
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  10. Brian Motley, 1988. "Should M2 be redefined?," Economic Review, Federal Reserve Bank of San Francisco, issue Win, pages 33-51.
  11. William T. Gavin & Finn E. Kydland, 1997. "Endogenous money supply and the business cycle," Working Papers 1995-010, Federal Reserve Bank of St. Louis.
  12. Michael R. Pakko, 1997. "The cyclical relationship between output and prices: an analysis in the frequency domain," Working Papers 1997-007, Federal Reserve Bank of St. Louis.
  13. William Poole, 1999. "Monetary policy rules?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 3-12.
  14. Stephen K. McNees, 1992. "A forward-looking monetary policy reaction function: continuity and change," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 3-13.
  15. Salemi, Michael K, 1995. "Revealed Preference of the Federal Reserve: Using Inverse-Control Theory to Interpret the Policy Equation of a Vector Autoregression," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(4), pages 419-33, October.
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  19. John Coleman & Christian Gilles & Pamela Labadie, 1993. "Identifying monetary policy with a model of the federal funds rate," Finance and Economics Discussion Series 93-24, Board of Governors of the Federal Reserve System (U.S.).
  20. Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-18.
  21. Robert G. King & Mark W. Watson, 1994. "The post-war U.S. Phillips curve: a revisionist econometric history," Working Paper Series, Macroeconomic Issues 94-14, Federal Reserve Bank of Chicago.
  22. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  23. Rolnick, Arthur J & Weber, Warren E, 1997. "Money, Inflation, and Output under Fiat and Commodity Standards," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1308-21, December.
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  25. Richard G. Anderson & Robert H. Rasche, 2000. "The domestic adjusted monetary base," Working Papers 2000-002, Federal Reserve Bank of St. Louis.
  26. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-39, March.
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Cited by:
  1. William T. Gavin & Finn E. Kydland & Michael R. Pakko, 2006. "Monetary policy, taxes and the business cycle," Working Papers 2004-017, Federal Reserve Bank of St. Louis.

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