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The Great Inflation Drift

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14862.

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Date of creation: Apr 2009
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Publication status: published as The Great Inflation Drift , Marvin Goodfriend, Robert G. King. in The Great Inflation: The Rebirth of Modern Central Banking , Bordo and Orphanides. 2013
Handle: RePEc:nbr:nberwo:14862

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  3. Marvin Goodfriend, 2004. "Monetary policy in the new neoclassical synthesis : a primer," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Sum, pages 21-45.
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  11. 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.
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Cited by:
  1. 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.
  2. Rochelle M. Edge & Refet S. Gurkaynak, 2011. "How useful are estimated DSGE model forecasts?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2011-11, Board of Governors of the Federal Reserve System (U.S.).
  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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