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Learning and the Great Inflation

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  • Carboni, Giacomo
  • Ellison, Martin

Abstract

We respond to the challenge of explaining the Great Inflation by building a coherent framework in which both learning and uncertainty play a central role. At the heart of our story is a Federal Reserve that learns and then disregards the Phillips curve as in Sargent's Conquest of American Inflation, but at all times takes into account that its view of the world is subject to considerable uncertainties. Allowing Federal Reserve policy to react to these perceived uncertainties improves our ability to explain the Great Inflation with a learning model. Bayesian MCMC estimation results are encouraging and favour a model where policy reacts to uncertainty over a model where uncertainty is ignored. The posterior likelihood is higher and the internal Federal Reserve forecasts implied by the model are closer to those reported in the Greenbook.

Suggested Citation

  • Carboni, Giacomo & Ellison, Martin, 2007. "Learning and the Great Inflation," CEPR Discussion Papers 6250, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6250
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    References listed on IDEAS

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    1. Timothy Cogley & Thomas J. Sargent, 2005. "Drift and Volatilities: Monetary Policies and Outcomes in the Post WWII U.S," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 262-302, April.
    2. Thomas J. Sargent & Noah Williams, 2005. "Impacts of Priors on Convergence and Escapes from Nash Inflation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 360-391, April.
    3. Giorgio E. Primiceri, 2006. "Why Inflation Rose and Fell: Policy-Makers' Beliefs and U. S. Postwar Stabilization Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 121(3), pages 867-901.
    4. Timothy Cogley & Thomas J. Sargent, 2005. "The conquest of US inflation: Learning and robustness to model uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 528-563, April.
    5. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 1(1), pages 59-83, February.
    6. William Poole & Robert H. Rasche, 2002. "Flation," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 1-6.
      • William Poole, 2002. "Flation," Speech 49, Federal Reserve Bank of St. Louis.
    7. In-Koo Cho & Noah Williams & Thomas J. Sargent, 2002. "Escaping Nash Inflation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 1-40.
    8. Thomas Sargent & Noah Williams & Tao Zha, 2006. "Shocks and Government Beliefs: The Rise and Fall of American Inflation," American Economic Review, American Economic Association, vol. 96(4), pages 1193-1224, September.
    9. Sack, Brian, 2000. "Does the fed act gradually? A VAR analysis," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 229-256, August.
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    Cited by:

    1. George W. Evans & Seppo Honkapohja, 2009. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," Central Banking, Analysis, and Economic Policies Book Series,in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 2, pages 027-076 Central Bank of Chile.
    2. Seth Pruitt, 2012. "Uncertainty Over Models and Data: The Rise and Fall of American Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 341-365, March.

    More about this item

    Keywords

    Great Inflation; learning; monetary policy; uncertainty;

    JEL classification:

    • 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
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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