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Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s?

Author

Listed:
  • Qazi Haque

    () (School of Economics, University of Adelaide)

  • Nicolas Groshenny

    () (School of Economics, University of Adelaide)

  • Mark Weder

    () (School of Economics, University of Adelaide)

Abstract

In this paper we examine whether or not monetary policy was a source of instability during the Great Inflation. We focus on a number of attributes that we see relevant for any analysis of the 1970s: cost-push or oil price shocks, positive trend inflation as well as real wage rigidity. We turn our artificial sticky-price economy into a Bayesian model and find that the U.S. economy during the 1970s is best characterized by a high degree of real wage rigidity. Oil price shocks thus created a trade-off between inflation and output-gap stabilization. Faced with this dilemma, the Federal Reserve reacted aggressively to inflation but hardly at all to the output gap, thereby inducing stability, i.e. determinacy.

Suggested Citation

  • Qazi Haque & Nicolas Groshenny & Mark Weder, 2018. "Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s?," School of Economics Working Papers 2018-03, University of Adelaide, School of Economics.
  • Handle: RePEc:adl:wpaper:2018-03
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    Cited by:

    1. Giovanni Nicolo, 2020. "Monetary Policy, Self-Fulfilling Expectations and the U.S. Business Cycle," Finance and Economics Discussion Series 2020-035, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    Monetary policy; Great Inflation; Cost-push shocks; Trend inflation; Sequential Monte Carlo algorithm;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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