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A Rehabilitation of Monetary Policy in the 1950s

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  • Christina D. Romer
  • David H. Romer

Abstract

Monetary policy in the United States in the 1950s was remarkably modern. Analysis of Federal Reserve records shows that policymakers had an overarching aversion to inflation and were willing to accept significant costs to prevent it from rising to even moderate levels. This aversion to inflation was the result of policymakers' beliefs that higher inflation could not raise output in the long run, that the level of output that would trigger increases in inflation was only moderate, and that inflation had large real costs in the medium and long runs. Furthermore, both narrative and empirical analysis indicates that policymakers were not wedded to free reserves or other faulty indicators in their implementation of policy. Empirical estimates of a forward-looking Taylor rule show that policymakers in the 1950s raised nominal interest rates more than one-for-one with increases in expected inflation, and suggests that monetary policy in the 1950s was more similar to policy in the 1980s and 1990s than to that in the late 1960s and 1970s. One implication of these findings is that the inflation of the late 1960s and 1970s must have been the result of a change in the conduct of policy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8800.

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Date of creation: Feb 2002
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Publication status: published as Romer, Christina D. and David H. Romer. "A Rehabilitation Of Monetary Policy In The 1950's," American Economic Review, 2002, v92(2,May), 121-127.
Handle: RePEc:nbr:nberwo:8800

Note: DAE EFG ME
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  1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 115(1), pages 147-180, February.
  2. Charles Calomiris & David Wheelock, 1998. "Was the Great Depression a Watershed for American Monetary Policy?," NBER Chapters, National Bureau of Economic Research, Inc, in: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, pages 23-66 National Bureau of Economic Research, Inc.
  3. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers, National Bureau of Economic Research, Inc 6768, National Bureau of Economic Research, Inc.
  4. William McChesney Martin, 1959. "A year of recession and recovery," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 110-109.
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  1. 'A Century of U.S. Central Banking: Goals, Frameworks, Accountability'
    by Mark Thoma in Economist's View on 2013-07-10 13:48:26
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Cited by:
  1. Athanasios Orphanides & John C. Williams, 2003. "The decline of activist stabilization policy: natural rate misperceptions, learning, and expectations," Working Paper Series, Federal Reserve Bank of San Francisco 2003-24, Federal Reserve Bank of San Francisco.
  2. Neely, Christopher J. & Rapach, David E., 2011. "International comovements in inflation rates and country characteristics," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(7), pages 1471-1490.
  3. William Poole & Robert H. Rasche & David C. Wheelock, 2012. "The Great Inflation: Did The Shadow Know Better?," NBER Chapters, National Bureau of Economic Research, Inc, in: The Great Inflation: The Rebirth of Modern Central Banking, pages 61-107 National Bureau of Economic Research, Inc.
  4. Athanasios Orphanides, 2003. "Historical monetary policy analysis and the Taylor rule," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-36, Board of Governors of the Federal Reserve System (U.S.).
  5. Kandil, Magda, 2005. "Money, interest, and prices: Some international evidence," International Review of Economics & Finance, Elsevier, Elsevier, vol. 14(2), pages 129-147.
  6. Bordo, Michael D. & Humpage, Owen F., 2014. "Federal Reserve Policy and Bretton Woods," Working Paper, Federal Reserve Bank of Cleveland 1407, Federal Reserve Bank of Cleveland.
  7. Steven J. Davis & James A. Kahn, 2008. "Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels," NBER Working Papers, National Bureau of Economic Research, Inc 14048, National Bureau of Economic Research, Inc.
  8. Christopher J. Neely & David E. Rapach, 2008. "Is inflation an international phenomenon?," Working Papers, Federal Reserve Bank of St. Louis 2008-025, Federal Reserve Bank of St. Louis.
  9. Andrew Levin & John B. Taylor, 2010. "Falling Behind the Curve: A Positive Analysis of Stop-Start Monetary Policies and the Great Inflation," NBER Working Papers, National Bureau of Economic Research, Inc 15630, National Bureau of Economic Research, Inc.
  10. Fendel, Ralf & Frenkel, Michael & Rülke, Jan-Christoph, 2011. "'Ex-ante' Taylor rules - Newly discovered evidence from the G7 countries," Journal of Macroeconomics, Elsevier, Elsevier, vol. 33(2), pages 224-232, June.

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