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The Great Inflation: Did the Shadow Know Better?

  • William Poole
  • Robert H. Rasche
  • David C. Wheelock

The Shadow Open Market Committee was formed in 1973 in response to rising inflation and the apparent unwillingness of U.S. policymakers to implement policies necessary to maintain price stability. This paper describes how the Committee's policy views differed from those of most Federal Reserve officials and many academic economists at the time. The Shadow argued that price stability should be the primary goal of monetary policy and favored gradual adjustment of monetary growth to a rate consistent with price stability. This paper evaluates the Shadow's policy rule in the context of the New Keynesian macroeconomic model of Clarida, Gali, and Gertler (1999). Simulations of the model suggest that the gradual stabilization of monetary growth favored by the Shadow would have lowered inflation with less impact on output growth and less variability in inflation or output than a one-time reduction in monetary growth. We conclude that the Shadow articulated a policy that would have outperformed the policies actually implemented by the Federal Reserve during the Great Inflation era.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16910.

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Date of creation: Mar 2011
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Publication status: published as The Great Inflation: Did The Shadow Know Better? , William Poole, Robert H. Rasche, David C. Wheelock. in The Great Inflation: The Rebirth of Modern Central Banking , Bordo and Orphanides. 2013
Handle: RePEc:nbr:nberwo:16910
Note: ME
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  1. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  2. Allan H. Meltzer, 1963. "The Demand for Money: The Evidence from the Time Series," Journal of Political Economy, University of Chicago Press, vol. 71, pages 219.
  3. Michael D. Bordo & Claudia Goldin & Eugene N. White, 1998. "The Defining Moment: The Great Depression and the American Economy in the Twentieth Century," NBER Books, National Bureau of Economic Research, Inc, number bord98-1, October.
  4. Richard G. Anderson & Robert H. Rasche, 2001. "The remarkable stability of monetary base velocity in the United States, 1919-1999," Working Papers 2001-008, Federal Reserve Bank of St. Louis.
  5. Laurence Ball, 1990. "Credible Disinflation with Staggered Price Setting," NBER Working Papers 3555, National Bureau of Economic Research, Inc.
  6. Charles W. Calomiris & David C. Wheelock, 1997. "Was the Great Depression a Watershed for American Monetary Policy?," NBER Working Papers 5963, National Bureau of Economic Research, Inc.
  7. Rasche, Robert H., 1987. "M1 -- Velocity and money-demand functions: Do stable relationships exist?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 9-88, January.
  8. Edward Nelson & Anna J. Schwartz, 2007. "The Impact of Milton Friedman on Modern Monetary Economics: Setting the Record Straight on Paul Krugman's "Who Was Milton Friedman?"," NBER Working Papers 13546, National Bureau of Economic Research, Inc.
  9. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  10. Laidler, David, 1981. "Monetarism: An Interpretation and an Assessment," Economic Journal, Royal Economic Society, vol. 91(361), pages 1-28, March.
  11. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
  12. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
  13. Dennis Hoffman & Robert H. Rasche, 1989. "Long-run Income and Interest Elasticities of Money Demand in the United States," NBER Working Papers 2949, National Bureau of Economic Research, Inc.
  14. Hafer, R. W. & Wheelock, David C., 2013. "Darryl Francis and the Making of Monetary Policy, 1966-1975," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 469-486.
  15. David Laidler, 1980. "Monetarism: An Interpretation and Assessment," RBA Research Discussion Papers rdp8009, Reserve Bank of Australia.
  16. William Poole, 1975. "Monetary Policy during the Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(1), pages 123-140.
  17. Phelps, Edmund S, 1978. "Commodity-Supply Shock and Full-Employment Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(2), pages 206-21, May.
  18. Christina D. Romer & David H. Romer, 2002. "A Rehabilitation of Monetary Policy in the 1950s," NBER Working Papers 8800, National Bureau of Economic Research, Inc.
  19. Brimmer, Andrew F, 1972. "The Political Economy of Money: Evolution and Impact of Monetarism in the Federal Reserve System," American Economic Review, American Economic Association, vol. 62(2), pages 344-52, May.
  20. Lyle E. Gramley & Samuel B. Chase, Jr., 1965. "Time deposits in monetary analysis," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 1380-1406.
  21. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
  22. Allan Meltzer, 2000. "The Shadow Open Market Committee: Origins and Operations," Journal of Financial Services Research, Springer, vol. 18(2), pages 119-128, December.
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