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Improvements in Macroeconomic Stability: The Role of Wages and Prices

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  • John B. Taylor

Abstract

This paper compares macroeconomic performance in the United States from 1891 through 1914 with the period after the Second World War by estimating reduced form autoregressions for prices, wages and output, by looking at their moving average representations, and by giving them simple structural interpretations. The results show that the impulses to the economic system were smaller in the later period, but the propagation mechanisms are much slower and more drawn out. The smaller shocks are therefore translated into larger and more prolonged fluctuations in output and inflation than would occur if the earlier dynamics were applicable in the later period. A tentative explanation for the changes in the dynamics is a slower speed of wage and price adjustment combined with a different accommodative stance for the monetary system.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1491.

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Date of creation: Nov 1984
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Publication status: published as Taylor, John B. "Improvements in Macroeconomic Stability: The Role of Wages and Prices." The American Business Cycle: Continuity and Change, edited by Robert J. Gordon. Chicago: University of Chicago Press, 1986, pp. 639-659 and 676-677.
Handle: RePEc:nbr:nberwo:1491

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  1. Taylor, John B., 1980. "Output and price stability: An international comparison," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 2(1), pages 109-132, May.
  2. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
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Cited by:
  1. Joseph E. Gagnon, 1989. "A forward-looking multicountry model: MX3," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 359, Board of Governors of the Federal Reserve System (U.S.).
  2. Ellis, C.J. & Holden, S., 1992. "Optimal Contract Length in a Reputational Model of Monetary Policy," Memorandum, Oslo University, Department of Economics 11/1992, Oslo University, Department of Economics.
  3. John Hassler & Petter Lundvik & Torsten Persson & Paul Soderlind, 1992. "The Swedish business cycle: stylized facts over 130 years," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 63, Federal Reserve Bank of Minneapolis.
  4. Edward Nelson, 2008. "Friedman and Taylor on monetary policy rules: a comparison," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 95-116.
  5. Nathan S. Balke & Robert J. Gordon, 1986. "The Estimation of Prewar GNP Volatility, 1869-1938," NBER Working Papers 1999, National Bureau of Economic Research, Inc.
  6. Magda Kandil, 2002. "Asymmetry In Economic Fluctuations In The Us Economy: The Pre-War And The 1946-1991 Periods Compared," International Economic Journal, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(1), pages 21-42.
  7. Allen, Steven G, 1992. "Changes in the Cyclical Sensitivity of Wages in the United States, 1891-1987," American Economic Review, American Economic Association, American Economic Association, vol. 82(1), pages 122-40, March.
  8. Olivier J. Blanchard, 1986. "Empirical Structural Evidence On Wages, Prices and Employment in the US," Working papers 431, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Selgin, George & Lastrapes, William D. & White, Lawrence H., 2012. "Has the Fed been a failure?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(3), pages 569-596.
  10. Victor Zarnowitz, 1989. "Cost and Price Movements in Business Cycle Theories and Experience: Causes and Effects of OBserved Changes (SEE ALSO WP3131-Send out together)," NBER Working Papers 3132, National Bureau of Economic Research, Inc.
  11. Neville Francis & Valerie A. Ramey, 2006. "The Source of Historical Economic Fluctuations: An Analysis Using Long-Run Restrictions," NBER Chapters, in: NBER International Seminar on Macroeconomics 2004, pages 17-73 National Bureau of Economic Research, Inc.
  12. Kearney, Colm & Daly, Kevin, 1997. "Monetary volatility and real output volatility: An empirical model of the financial transmission mechanism in Australia," International Review of Financial Analysis, Elsevier, Elsevier, vol. 6(2), pages 77-95.

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