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The Great Inflation in the United States and the United Kingdom: Reconciling Policy Decisions and Data Outcomes

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  • Riccardo DiCecio
  • Edward Nelson

Abstract

We argue that the Great Inflation experienced by both the United Kingdom and the United States in the 1970s has an explanation valid for both countries. The explanation does not appeal to common shocks or to exchange rate linkages, but to the common doctrine underlying the systematic monetary policy choices in each country. The nonmonetary approach to inflation control that was already influential in the United Kingdom came to be adopted by the United States during the 1970s. We document our position by examining official policymaking doctrine in the United Kingdom and the United States in the 1970s, and by considering results from a structural macroeconomic model estimated using U.K. data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14895.

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Date of creation: Apr 2009
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Publication status: published as The Great Inflation in the United States and the United Kingdom: Reconciling Policy Decisions and Data Outcomes , Riccardo DiCecio, Edward Nelson. in The Great Inflation: The Rebirth of Modern Central Banking , Bordo and Orphanides. 2013
Handle: RePEc:nbr:nberwo:14895

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  1. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 640, Board of Governors of the Federal Reserve System (U.S.).
  2. John H. Cochrane, 1998. "A Frictionless View of U.S. Inflation," NBER Working Papers 6646, National Bureau of Economic Research, Inc.
  3. Nelson Edward, 2005. "The Great Inflation of the Seventies: What Really Happened?," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 5(1), pages 1-50, July.
  4. V.V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1996. "Expectation traps and discretion," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago WP-96-5, Federal Reserve Bank of Chicago.
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  7. Beyer, Andreas & Gaspar, Vítor & Gerberding, Christina & Issing, Otmar, 2009. "Opting out of the Great Inflation: German monetary policy after the break down of Bretton Woods," Working Paper Series, European Central Bank 1020, European Central Bank.
  8. Friedman, Milton, 1972. "Have Monetary Policies Failed?," American Economic Review, American Economic Association, American Economic Association, vol. 62(2), pages 11-18, May.
  9. Riccardo DiCecio & Edward Nelson, 2007. "An estimated DSGE model for the United Kingdom," Working Papers, Federal Reserve Bank of St. Louis 2007-006, Federal Reserve Bank of St. Louis.
  10. Christina D. Romer & David H. Romer, 2003. "Choosing the Federal Reserve Chair: Lessons from History," NBER Working Papers 10161, National Bureau of Economic Research, Inc.
  11. Gorodnichenko, Yuriy & Shapiro, Matthew D., 2007. "Monetary policy when potential output is uncertain: Understanding the growth gamble of the 1990s," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(4), pages 1132-1162, May.
  12. Luca Benati, 2004. "Evolving post-World War II UK economic performance," Bank of England working papers, Bank of England 232, Bank of England.
  13. Orphanides, Athanasios, 1999. "The Quest for Prosperity Without Inflation," Working Paper Series 93, Sveriges Riksbank (Central Bank of Sweden).
  14. Ramey, Valerie, 1993. "How important is the credit channel in the transmission of monetary policy?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 1-45, December.
  15. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research, National Bank of Belgium 109, National Bank of Belgium.
  16. Michael D. Bordo & Barry Eichengreen, 2008. "Bretton Woods and the Great Inflation," NBER Working Papers 14532, National Bureau of Economic Research, Inc.
  17. Harrison, Richard & Oomen, Özlem, 2010. "Evaluating and estimating a DSGE model for the United Kingdom," Bank of England working papers, Bank of England 380, Bank of England.
  18. Michael R. Darby & James R. Lothian & Arthur E. Gandolfi & Anna J. Schwartz & Alan C. Stockman, 1983. "The International Transmission of Inflation," NBER Books, National Bureau of Economic Research, Inc, number darb83-1, July.
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Cited by:
  1. Philip Liu & Haroon Mumtaz, 2011. "Evolving Macroeconomic Dynamics in a Small Open Economy: An Estimated Markov Switching DSGE Model for the UK," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 43(7), pages 1443-1474, October.
  2. Hendrickson, Joshua, 2010. "An Overhaul of Fed Doctrine: Nominal Income and the Great Moderation," MPRA Paper 20346, University Library of Munich, Germany.
  3. Charles L. Weise, 2012. "Political Pressures on Monetary Policy during the US Great Inflation," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 4(2), pages 33-64, April.
  4. Hendrickson, Joshua R., 2012. "An overhaul of Federal Reserve doctrine: Nominal income and the Great Moderation," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(2), pages 304-317.
  5. Julio J. Rotemberg, 2013. "Shifts in US Federal Reserve Goals and Tactics for Monetary Policy: A Role for Penitence?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 27(4), pages 65-86, Fall.
  6. Edward Nelson, 2011. "A review of Allan Meltzer's "A History of the Federal Reserve, Volume 2"," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2011-59, Board of Governors of the Federal Reserve System (U.S.).

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