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The Great Inflation: Did the Shadow Know Better?

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  • William Poole
  • Robert H. Rasche
  • David C. Wheelock

Abstract

The Shadow Open Market Committee was formed in 1973 in response to rising inflation and the apparent unwillingness of U.S. policymakers to implement policies necessary to maintain price stability. This paper describes how the Committee’s policy views differed from those of most Federal Reserve officials and many academic economists at the time. The Shadow argued that price stability should be the primary goal of monetary policy and favored gradual adjustment of monetary growth to a rate consistent with price stability. This paper evaluates the Shadow’s policy rule in the context of the New Keynesian macroeconomic model of Clarida, Gali, and Gertler (1999). Simulations of the model suggest that the gradual stabilization of monetary growth favored by the Shadow would have lowered inflation with less impact on output growth and less variability in inflation or output than a one-time reduction in monetary growth. We conclude that the Shadow articulated a policy that would have outperformed the policies actually implemented by the Federal Reserve during the Great Inflation era.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16910.

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Date of creation: Mar 2011
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Handle: RePEc:nbr:nberwo:16910

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  1. Allan Meltzer, 2000. "The Shadow Open Market Committee: Origins and Operations," Journal of Financial Services Research, Springer, vol. 18(2), pages 119-128, December.
  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.
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  1. Could the Shadow Open Market Committee have outperfomed the Fed?
    by Economic Logician in Economic Logic on 2011-05-10 13:51:00

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