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

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Listed:
  • Qazi Haque

    () (University of Western Australia and CAMA)

  • Nicolas Groshenny

    () (School of Economics, University of Adelaide and CAMA)

  • Mark Weder

    () (Aarhus University and CAMA)

Abstract

The paper re-examines whether the Federal Reserves monetary policy was a source of instability during the Great Ination by estimating a sticky-price model with positive trend ination, commodity price shocks and sluggish real wages. Our estimation provides empirical evidence for substantial wage-rigidity and nds that the Federal Reserve responded aggressively to ination but negligibly to the output gap. In the presence of non-trivial real imperfections and well-identified commodity price-shocks, U.S. data prefers a determinate version of the New Keynesian model: monetary policy-induced indeterminacy and sunspots were not causes of macroeconomic instability during the pre-Volcker era.

Suggested Citation

  • Qazi Haque & Nicolas Groshenny & Mark Weder, 2019. "Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s?," School of Economics Working Papers 2019-06, University of Adelaide, School of Economics.
  • Handle: RePEc:adl:wpaper:2019-06
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    File URL: https://media.adelaide.edu.au/economics/papers/doc/wp2019-06.pdf
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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

    Trend ination; Monetary policy; Great Ination; Cost-push shocks; Indeterminacy; Wage sluggishnes; 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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