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Monetary Policy Uncovered, Flying Blind: The FederalReserve's Experiment with Unobservables

Listed author(s):
  • Dimitri B. Papadimitriou
  • L. Randall Wray

Experience with a variety of targets has cast doubt on the likelihood that a single variable can be found to be closely and reliably linked to future inflation; it is even less likely that such a variable, should it be found, would somehow be under the control and manipulation of the Federal Reserve. Papadimitriou and Wray review the experiments with various targets undertaken by former Fed chairman Paul Volcker and current chairman Alan Greenspan. The authors contend that there is no reason to suppose that the Fed will discover a target variable whose control will yield stable prices. Finally, they conclude that economists lack sufficient information to calculate the costs of achieving stable prices in terms of unemployment and lost output.

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File URL: http://www.levyinstitute.org/pubs/ppb15.pdf
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Paper provided by Levy Economics Institute in its series Economics Public Policy Brief Archive with number ppb_15.

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Handle: RePEc:lev:levppb:ppb_15
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  1. John B. Carlson, 1993. "Assessing real interest rates," Economic Commentary, Federal Reserve Bank of Cleveland, issue Aug.
  2. Joseph A. Ritter, 1993. "The FOMC in 1992: a monetary conundrum," Review, Federal Reserve Bank of St. Louis, issue May, pages 31-49.
  3. Daniel L. Thornton, 1988. "The borrowed-reserves operating procedures: theory and evidence," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 30-54.
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