US Inflation and Inflation Uncertainty Over 200 Years

This paper uses historical US infl ation data covering over two centuries, to examine the impact of the establishment of the US Federal Reserve on average US inflation and inflation uncertainty. We find that the founding of the Fed is associated with higher average US inflation and lower inflation uncertainty. Critically, these results are not driven by the post-1980 period, where the Fed policy is characterized by the dual mandate. Other important results are that the Gold Standard period is associated with both lower inflation and inflation uncertainty, and that banking and stock market crises are a positive determinant of inflation uncertainty and perhaps inflation. The two world wars and the US civil war are associated with both higher inflation and higher inflation uncertainty. In addition, we find that the central bank has responded to increasing inflation uncertainty in a stabilizing manner in support of the Holland hypothesis.