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A Rehabilitation of Monetary Policy in the 1950's

Author

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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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Suggested Citation

  • Christina D. Romer & David H. Romer, 2002. "A Rehabilitation of Monetary Policy in the 1950's," American Economic Review, American Economic Association, vol. 92(2), pages 121-127, May.
  • Handle: RePEc:aea:aecrev:v:92:y:2002:i:2:p:121-127
    Note: DOI: 10.1257/000282802320189113
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    References listed on IDEAS

    as
    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    2. Charles Calomiris & David Wheelock, 1998. "Was the Great Depression a Watershed for American Monetary Policy?," NBER Chapters,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, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters,in: Monetary Policy Rules, pages 319-348 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.), issue Feb, pages 110-109.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. 'A Century of U.S. Central Banking: Goals, Frameworks, Accountability'
      by Mark Thoma in Economist's View on 2013-07-10 18:48:26

    Citations

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    Cited by:

    1. Corsetti, G. & Duarte, J. B. & Mann, S., 2018. "One Money, Many Markets - A Factor Model Approach to Monetary Policy in the Euro Area with High-Frequency Identification," Cambridge Working Papers in Economics 1816, Faculty of Economics, University of Cambridge.
    2. Steven J. Davis & James A. Kahn, 2008. "Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels," Journal of Economic Perspectives, American Economic Association, vol. 22(4), pages 155-180, Fall.
    3. Jan Christoph Ruelke & Ralf Fendel & Michael Frenkel, 2011. "Do Professional Forecasters Trust in Taylor-Type Rules? - Evidence from the Wall Street Journal Poll," Post-Print hal-00743770, HAL.
    4. Orphanides, Athanasios & Williams, John C., 2005. "The decline of activist stabilization policy: Natural rate misperceptions, learning, and expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1927-1950, November.
    5. William Poole & Robert H. Rasche & David C. Wheelock, 2012. "The Great Inflation: Did The Shadow Know Better?," NBER Chapters,in: The Great Inflation: The Rebirth of Modern Central Banking, pages 61-107 National Bureau of Economic Research, Inc.
    6. Kandil, Magda, 2005. "Money, interest, and prices: Some international evidence," International Review of Economics & Finance, Elsevier, vol. 14(2), pages 129-147.
    7. Taylor, John B. & Williams, John C., 2010. "Simple and Robust Rules for Monetary Policy," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 15, pages 829-859 Elsevier.
    8. srithilat, khaysy & Sun, Gang, 2017. "The Impact of Monetary Policy on Economic Development: Evidence from Lao PDR," MPRA Paper 79369, University Library of Munich, Germany, revised 27 Apr 2017.
    9. Ralf Fendel & Michael Frenkel & Jan-Christoph Rülke, 2008. "'Ex-ante' Taylor rules - Newly discovered evidence from the G7 countries," WHU Working Paper Series - Economics Group 08-03, WHU - Otto Beisheim School of Management.
    10. Neely, Christopher J. & Rapach, David E., 2011. "International comovements in inflation rates and country characteristics," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1471-1490.
    11. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
    12. Jacek Suda & Anastasia Zervou, 2016. "International Great Inflation and Common Monetary Policy," Working Papers 20160513_001, Texas A&M University, Department of Economics.
    13. Yoosoon Chang & Boreum Kwak, 2017. "U.S. Monetary-Fiscal Regime Changes in the Presence of Endogenous Feedback in Policy Rules," Caepr Working Papers 2017-016 Classification- , Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    14. Bordo, Michael D. & Humpage, Owen F., 2014. "Federal Reserve Policy and Bretton Woods," Working Paper 1407, Federal Reserve Bank of Cleveland.
    15. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093, April.
    16. Eric Monnet & Damien Puy, 2016. "Has Globalization Really Increased Business Cycle Synchronization?," IMF Working Papers 16/54, International Monetary Fund.
    17. Giancarlo Corsetti & Joao B. Duarte & Samuel Mann, 2018. "One Money, Many Markets," Discussion Papers 1805, Centre for Macroeconomics (CFM).
    18. Fendel, Ralf & Frenkel, Michael & Rülke, Jan-Christoph, 2011. "'Ex-ante' Taylor rules - Newly discovered evidence from the G7 countries," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 224-232, June.
    19. Christopher J. Neely & David E. Rapach, 2008. "Is inflation an international phenomenon?," Working Papers 2008-025, Federal Reserve Bank of St. Louis.
    20. 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 15630, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-

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