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Did the Great Inflation occur despite policymaker commitment to a Taylor rule?

  • James Bullard
  • Stefano Eusepi

The authors study the hypothesis that misperceptions of trend productivity growth during the onset of the productivity slowdown in the United States caused much of the great inflation of the 1970s. They use the general equilibrium, sticky price framework of Woodford (2002), augmented with learning using the techniques of Evans and Honkapohja (2001). The authors allow for endogenous investment as well as explicit, exogenous growth in productivity and the labor input. They assume the monetary policymaker is committed to using a Taylor-type policy rule. The authors study how this economy reacts to an unexpected change in the trend productivity growth rate under learning. They find that a substantial portion of the observed increase in inflation during the 1970s can be attributed to this source.

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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2003-20.

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Date of creation: 2003
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Handle: RePEc:fip:fedawp:2003-20
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  1. Alex Cukierman & Francesco Lippi, 2003. "Endogenous Monetary Policy with Unobserved Potential Output," CEIS Research Paper 26, Tor Vergata University, CEIS.
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  5. William Poole, 1999. "Monetary policy rules?," Speech 81, Federal Reserve Bank of St. Louis.
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  7. James B. Bullard & John Duffy, 2004. "Learning and structural change in macroeconomic data," Working Papers 2004-016, Federal Reserve Bank of St. Louis.
  8. Ireland, Peter N., 1999. "Does the time-consistency problem explain the behavior of inflation in the United States?," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 279-291, October.
  9. Bullard, James & Cho, In-Koo, 2003. "Escapist policy rules," CFS Working Paper Series 2003/38, Center for Financial Studies (CFS).
  10. Orphanides, Athanasios, 2004. "Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 151-75, April.
  11. George W. Evans & Seppo Honkapohja, 2001. "Expectations and the Stability Problem for Optimal Monetary Policies," University of Oregon Economics Department Working Papers 2001-6, University of Oregon Economics Department, revised 03 Aug 2001.
  12. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
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  19. William Poole, 2002. "Flation," Speech 49, Federal Reserve Bank of St. Louis.
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  20. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
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  22. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
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  25. Christopher J. Erceg & Andrew T. Levin, 2001. "Imperfect credibility and inflation persistence," Finance and Economics Discussion Series 2001-45, Board of Governors of the Federal Reserve System (U.S.).
  26. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  27. Bruce E. Hansen, 2001. "The New Econometrics of Structural Change: Dating Breaks in U.S. Labour Productivity," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 117-128, Fall.
  28. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, August.
  29. Taylor, John B., 1999. "Staggered price and wage setting in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 15, pages 1009-1050 Elsevier.
  30. Miguel Casares & Bennett T. McCallum, 2000. "An Optimizing IS-LM Framework with Endogenous Investment," NBER Working Papers 7908, National Bureau of Economic Research, Inc.
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  32. Andrea Tambalotti, 2004. "Optimal monetary policy and productivity growth," Money Macro and Finance (MMF) Research Group Conference 2003 99, Money Macro and Finance Research Group.
  33. Preston, Bruce, 2008. "Adaptive learning and the use of forecasts in monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3661-3681, November.
  34. repec:dgr:kubcen:200072 is not listed on IDEAS
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