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

  • James B. Bullard
  • Stefano Eusepi

We study the hypothesis that misperceptions of trend productivity growth during the onset of the productivity slowdown in the U.S. caused much of the great inflation of the 1970s. We use the general equilibrium, sticky price framework of Woodford (2003), augmented with learning using the techniques of Evans and Honkapohja (2001). We allow for endogenous investment as well as explicit, exogenous growth in productivity and the labor input. We assume the monetary policymaker is committed to using a Taylortype policy rule. We study how this economy reacts to an unexpected change in the trend productivity growth rate under learning. We 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 St. Louis in its series Working Papers with number 2003-013.

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Date of creation: 2004
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Publication status: Published in Review of Economic Dynamics, April 2005, 8(2), pp. 324-59
Handle: RePEc:fip:fedlwp:2003-013
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  1. 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.
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  32. 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.
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