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The reform of October 1979: how it happened and why

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Author Info
David E. Lindsey
Athanasios Orphanides
Robert H. Rasche

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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 Federal Reserve Bank of St. Louis in its series Working Papers with number 2004-033.

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Date of creation: 2004
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Handle: RePEc:fip:fedlwp:2004-033

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Keywords: Monetary policy ; Federal Reserve System - History;

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References listed on IDEAS
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.:
  1. Lindsey, David E. & Farrx, Helen T. & Gillum, Gary P. & Kopecky, Kenneth J. & Porter, Richard D., 1984. "Short-run monetary control : Evidence under a non-borrowed reserve operating procedure," Journal of Monetary Economics, Elsevier, vol. 13(1), pages 87-111, January. [Downloadable!] (restricted)
  2. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January. [Downloadable!] (restricted)
  3. Sivesind, Charles & Hurley, Kevin, 1980. "Choosing an Operating Target for Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 94(1), pages 199-203, February.
  4. Axilrod, Stephen H & Lindsey, David E, 1981. "Federal Reserve System Implementation of Monetary Policy: Analytical Foundations of the New Approach," American Economic Review, American Economic Association, vol. 71(2), pages 246-52, May. [Downloadable!] (restricted)
  5. Athanasios Orphanides and Simon van Norden, 2001. "The Reliability of Inflation Forecasts Based on Output Gaps in Real Time," Computing in Economics and Finance 2001 247, Society for Computational Economics.
  6. Goodfriend, Marvin, 1986. "Monetary mystique: Secrecy and central banking," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 63-92, January. [Downloadable!] (restricted)
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  7. John C. Williams & Athanasios Orphanides, 2004. "The Decline of Activist Stabilization Policy: Natural Rate Misperceptions, Learning, and Expectations," Computing in Economics and Finance 2004 144, Society for Computational Economics. [Downloadable!]
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  8. Stephen H. Axilrod, 1981. "New monetary control procedure: findings and evaluation from a Federal Reserve study," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 277-290.
  9. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)
  10. 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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  11. Athanasios Orphanides, 2002. "Monetary-Policy Rules and the Great Inflation," American Economic Review, American Economic Association, vol. 92(2), pages 115-120, May. [Downloadable!]
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  12. Axilrod, Stephen H, 1985. "On Consequences and Criticisms of Monetary Targeting: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 598-602, November. [Downloadable!] (restricted)
  13. Johannes, James M. & Rasche, Robert H., 1979. "Predicting the money multiplier," Journal of Monetary Economics, Elsevier, vol. 5(3), pages 301-325, July. [Downloadable!] (restricted)
  14. Johannes, James M & Rasche, Robert H, 1981. "Can the Reserves Approach to Monetary Control Really Work?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(3), pages 298-313, August. [Downloadable!] (restricted)
  15. Orphanides, Athanasios, 2004. "Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 151-75, April.
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  16. Tobin, James, 1985. "On Consequences and Criticisms of Monetary Targeting, or Monetary Targeting: Dead at Last? Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 605-09, November. [Downloadable!] (restricted)
  17. Poole, William, 1985. "On Consequences and Criticisms of Monetary Targeting: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 602-05, November. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. 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. [Downloadable!]
    Other versions:
  2. 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.). [Downloadable!]
    Other versions:
  3. 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. [Downloadable!]
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