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The Incredible Volcker Disinflation

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Author Info
Marvin Goodfriend
Robert King

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Abstract

Using a simple modern macroeconomic model, we argue that the real effects of the Volcker disinflation in the early 1980s were mainly due to imperfect credibility, evident in volatility and stubbornness of long-term interest rates. Studying recently released transcripts of the Federal Open Market Committee, we find -- to our surprise -- that Volcker and other FOMC members also regarded long-term interest rates as key indicators of inflation expectations and of their disinflationary policy's credibility. We also consider the interplay of monetary targets, operating procedures, and credibility during the Volcker disinflation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11562.

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Date of creation: Aug 2005
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Handle: RePEc:nbr:nberwo:11562

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Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
N1 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations

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  1. Parkin, Michael, 1978. "A Comparison of Alternative Techniques of Monetary Control under Rational Expectations," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 46(3), pages 252-87, September.
  2. Christopher J. Erceg and Andrew T. Levin, 2001. "Imperfect Credibility and Inflation Persistence," Computing in Economics and Finance 2001 19, Society for Computational Economics.
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  3. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April. [Downloadable!] (restricted)
  4. McCallum, Bennett T., 1981. "Price level determinacy with an interest rate policy rule and rational expectations," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 319-329. [Downloadable!] (restricted)
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  5. Baxter, Marianne, 1985. "The role of expectations in stabilization policy," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 343-362, May. [Downloadable!] (restricted)
  6. Ball, Laurence, 1994. "Credible Disinflation with Staggered Price-Setting," American Economic Review, American Economic Association, vol. 84(1), pages 282-89, March. [Downloadable!] (restricted)
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  7. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
  8. Christina D. Romer and David H. Romer., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Economics Working Papers 89-107, University of California at Berkeley.
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  9. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, vol. 68(2), pages 348-52, May.
  10. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond. [Downloadable!]
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  11. Romer, Christina D. & Romer, David H., 1994. "Monetary policy matters," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 75-88, August. [Downloadable!] (restricted)
  12. Matthew D. Shapiro, 1994. "Federal Reserve Policy: Cause and Effect," NBER Working Papers 4342, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Robert L. Hetzel, 1998. "Arthur Burns and inflation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 21-44. [Downloadable!]
  14. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1.
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