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Federal Reserve credibility and inflation scares

  • Chan G. Huh
  • Kevin J. Lansing

We develop a simple, quantitative model of the U.S. economy to demonstrate how an "inflation scare " may occur when the Federal Reserve lacks full credibility. In particular, we show that the long-term nominal interest rate may undergo a sudden increase if an adverse movement in the inflation rate triggers a deterioration in the public's beliefs about the Federal Reserve's commitment to maintaining low inflation in the future. We find that simulations from our model capture some observed patterns of U.S. interest rates in the 1980s.

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File URL: http://www.frbsf.org/econrsrch/econrev/98-2/3-16.pdf
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Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (1998)
Issue (Month): ()
Pages: 3-16

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Handle: RePEc:fip:fedfer:y:1998:p:3-16:n:2
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