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The reform of October 1979: how it happened and why

  • David E. Lindsey
  • Athanasios Orphanides
  • Robert H. Rasche

This study offers a historical review of the monetary policy reform of October 6, 1979, and discusses the influences behind it and its significance. We lay out the record from the start of 1979 through the spring of 1980, relying almost exclusively upon contemporaneous sources, including the recently released transcripts of Federal Open Market Committee (FOMC) meetings during 1979. We then present and discuss in detail the reasons for the FOMC's adoption of the reform and the communications challenge presented to the Committee during this period. Further, we examine whether the essential characteristics of the reform were consistent with monetarism, new, neo, or old-fashioned Keynesianism, nominal income targeting, and inflation targeting. The record suggests that the reform was adopted when the FOMC became convinced that its earlier gradualist strategy using finely tuned interest rate moves had proved inadequate for fighting inflation and reversing inflation expectations. The new plan had to break dramatically with established practice, allow for the possibility of substantial increases in short-term interest rates, yet be politically acceptable, and convince financial markets participants that it would be effective. The new operating procedures were also adopted for the pragmatic reason that they would likely succeed.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2005-02.

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Date of creation: 2005
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Handle: RePEc:fip:fedgfe:2005-02
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  4. Orphanides, Athanasios & Williams, John C, 2005. "The Decline of Activist Stabilization Policy: Natural Rate Misperceptions, Learning and Expectations," CEPR Discussion Papers 4865, C.E.P.R. Discussion Papers.
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  9. anonymous, 1990. "Membership of the Board of Governors of the Federal Reserve System," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Sep, pages 799-800.
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  13. Athanasios Orphanides and Simon van Norden, 2001. "The Reliability of Inflation Forecasts Based on Output Gaps in Real Time," Computing in Economics and Finance 2001 247, Society for Computational Economics.
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  16. Stephen H. Axilrod, 1981. "New monetary control procedure: findings and evaluation from a Federal Reserve study," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 277-290.
  17. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, June.
  18. Sivesind, Charles & Hurley, Kevin, 1980. "Choosing an Operating Target for Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 94(1), pages 199-203, February.
  19. Lindsey, David E. & Farrx, Helen T. & Gillum, Gary P. & Kopecky, Kenneth J. & Porter, Richard D., 1984. "Short-run monetary control : Evidence under a non-borrowed reserve operating procedure," Journal of Monetary Economics, Elsevier, vol. 13(1), pages 87-111, January.
  20. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
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  24. Tobin, James, 1985. "On Consequences and Criticisms of Monetary Targeting, or Monetary Targeting: Dead at Last? Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 605-09, November.
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