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Credibility and monetary policy

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  • Bennett T. McCallum

Abstract

The purpose of this paper is to describe and evaluate the most important existing ideas concerning credibility of monetary policy, with special emphasis given to matters pertaining to the U.S. economy and the practices and procedures of the Fed. The main discussion begins with Fellner's hypothesis that the costs of a disinflationary episode will be smaller when the public believes that the disinflation will in fact be carried out. This hypothesis has been challenged recently by several writers; an evaluation of their evidence is attempted and some new results presented. Next, the discussion turns to positive analyses of the monetary policy-making process. Models developed by Barro and Gordon and others are examined, the object being to develop an understanding of why certain features of monetary policy tend to prevail. The main implications of this analysis are then used to consider various strategies for obtaining a type of policy behavior that might produce better macroeconomic results--less inflation with no more unemployment--than the U.S. has experienced in the recent past. Particular proposals touched upon include the adoption of a commodity-money standard, a balanced-budget amendment, a legislated monetary rule, a nominal GNP target, and the absorption of the Fed into the Treasury.
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Suggested Citation

  • Bennett T. McCallum, 1984. "Credibility and monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 105-135.
  • Handle: RePEc:fip:fedkpr:y:1984:p:105-135
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    References listed on IDEAS

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    1. Robert E. Lucas, Jr., 1980. "Rules, Discretion, and the Role of the Economic Advisor," NBER Chapters,in: Rational Expectations and Economic Policy, pages 199-210 National Bureau of Economic Research, Inc.
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    6. Grossman, Herschel I., 1983. "The natural-rate hypothesis, the rational-expectations hypothesis, and the remarkable survival of non-market-clearing assumptions," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 19(1), pages 225-245, January.
    7. Benjamin M. Friedman, 1983. "Recent Perspectives in and on Macroeconomics," NBER Working Papers 1208, National Bureau of Economic Research, Inc.
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    9. Sargent, Thomas J, 1971. "A Note on the 'Accelerationist' Controversy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(3), pages 721-725, August.
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    12. Robert J. Barro, 1982. "United States Inflation and the Choice of Monetary Standard," NBER Chapters,in: Inflation: Causes and Effects, pages 99-110 National Bureau of Economic Research, Inc.
    13. Friedman, Benjamin M, 1984. "Lessons from the 1979-82 Monetary Policy Experiment," American Economic Review, American Economic Association, vol. 74(2), pages 382-387, May.
    14. George L. Perry, 1983. "What Have We Learned about Disinflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 587-602.
    15. Gordon, Robert J, 1984. "Supply Shocks and Monetary Policy Revisited," American Economic Review, American Economic Association, vol. 74(2), pages 38-43, May.
    16. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    17. Phillip Cagan & William Fellner, 1983. "Tentative Lessons from the Recent Disinflationary Effort," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 603-610.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Monetary policy target regimes: inflation, price level, nominal GDP, etc.
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2014-06-19 17:00:50
    2. 'Monetary Policy Target Regimes: Inflation, Price Level, Nominal GDP, etc.'
      by Mark Thoma in Economist's View on 2014-06-21 12:55:00

    Citations

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    Cited by:

    1. Aurélien Goutsmedt & Erich Pinzón-Fuchs & Matthieu Renault & Francesco Sergi, 2017. "Reacting to the Lucas Critique: The Keynesians' Pragmatic Replies," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01625169, HAL.
    2. Carl E. Walsh, 1987. "The impact of monetary targeting in the United States, 1976-1984," Working Papers in Applied Economic Theory 87-04, Federal Reserve Bank of San Francisco.
    3. Naohito Abe & Yuko Ueno, 2016. "The Mechanism of Inflation Expectation Formation among Consumers," UTokyo Price Project Working Paper Series 064, University of Tokyo, Graduate School of Economics.
    4. Carl E. Walsh, 1987. "Monetary targeting and inflation: 1976-1984," Economic Review, Federal Reserve Bank of San Francisco, issue Win, pages 5-16.
    5. Thomas F. Cosimano & Michael T. Gapen, 2003. "Optimal Fiscal and Monetary Policy with Nominal and Indexed Debt," IMF Working Papers 03/225, International Monetary Fund.
    6. Robert G. King, 2008. "The Phillips curve and U.S. macroeconomic policy : snapshots, 1958-1996," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 311-359.
    7. Abe, Naohito & Ueno, Yuko, 2016. "The Mechanism of Inflation Expectation Formation among Consumers," RCESR Discussion Paper Series DP16-1, Research Center for Economic and Social Risks, Institute of Economic Research, Hitotsubashi University.

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    Keywords

    Monetary policy;

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