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The Incredible Volcker Disinflation

  • Marvin Goodfriend
  • Robert King

Using a simple modern macroeconomic model, we argue that the real effects of the Volcker disinflation in the early 1980s were mainly due to imperfect credibility, evident in volatility and stubbornness of long-term interest rates. Studying recently released transcripts of the Federal Open Market Committee, we find -- to our surprise -- that Volcker and other FOMC members also regarded long-term interest rates as key indicators of inflation expectations and of their disinflationary policy's credibility. We also consider the interplay of monetary targets, operating procedures, and credibility during the Volcker disinflation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11562.

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Date of creation: Aug 2005
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Publication status: published as Goodfriend, Marvin and Robert G. King. "The Incredible Volcker Disinflation," Journal of Monetary Economics, 2005, v52(5,Jul), 981-1015.
Handle: RePEc:nbr:nberwo:11562
Note: EFG ME
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  1. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May.
  2. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, vol. 68(2), pages 348-52, May.
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  10. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, December.
  11. Matthew D. Shapiro, 1993. "Federal Reserve Policy: Cause and Effect," NBER Working Papers 4342, National Bureau of Economic Research, Inc.
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  14. McCallum, Bennett T., 1981. "Price level determinacy with an interest rate policy rule and rational expectations," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 319-329.
  15. Parkin, Michael, 1978. "A Comparison of Alternative Techniques of Monetary Control under Rational Expectations," The Manchester School of Economic & Social Studies, University of Manchester, vol. 46(3), pages 252-87, September.
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