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Three great American disinflations

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  • Bordo, Michael D.
  • Erceg, Christopher
  • Levin, Andrew
  • Michaels, Ryan

Abstract

In this paper, we examine three famous episodes of deliberate deflation (or disinflation) in U.S. history, including episodes following the Civil War, World War I, and the Volcker disinflation of the early 1980s. These episodes were associated with widely divergent effects on the real economy, which we attribute both to differences in the policy actions undertaken, and to the transparency and credibility of the monetary authorities. We attempt to account for the salient features of each episode within the context of a stylized DSGE model. Our model simulations indicate how a more predictable policy of gradual deflation could have helped avoid the sharp post-WWI depression. But our analysis also suggests that the strong argument for gradualism under a transparent monetary regime becomes less persuasive if the monetary authority lacks credibility; in this case, an aggressive policy stance (as under Volcker) can play a useful signalling role by making a policy shift more apparent to private agents. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2007/05.

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Date of creation: 2006
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Handle: RePEc:zbw:cfswop:200705

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Keywords: DSGE Model; Credibility; Deflation;

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References

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Citations

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Cited by:
  1. Michael D. Bordo & Joseph G. Haubrich, 2009. "Credit Crises, Money and Contractions: an historical view," NBER Working Papers 15389, National Bureau of Economic Research, Inc.
  2. Elmar Mertens, 2010. "Managing beliefs about monetary policy under discretion," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2010-11, Board of Governors of the Federal Reserve System (U.S.).
  3. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Working Papers, Princeton University, Department of Economics, Center for Economic Policy Studies. 1038, Princeton University, Department of Economics, Center for Economic Policy Studies..
  4. Barnett, Alina & Ellison, Martin, 2012. "Learning by disinflating," Research Discussion Papers, Bank of Finland 10/2012, Bank of Finland.
  5. Wolfgang Pollan, . "Incomes Policies, Expectations and the NAIRU," WIFO Working Papers, WIFO 433, WIFO.
  6. Christopher Reicher, 2009. "What Can a New Keynesian Labor Matching Model Match?," Kiel Working Papers 1496, Kiel Institute for the World Economy.
  7. Michael D. Bordo & David C. Wheelock, 2007. "Stock market booms and monetary policy in the twentieth century," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Mar, pages 91-122.

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