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Political constraints on monetary policy during the Great Inflation

  • Weise, Charles L

The U.S. Great Inflation of the 1970s was characterized by repeated, failed attempts at disinflation by the Federal Reserve as well as periods of inaction despite rising inflation. Previous research has attributed these failures to policymakers’ “misperceptions” about monetary policy and the macroeconomy. This paper argues instead that the Fed’s behavior during this period can be explained as a response to political constraints. Members of the Fed understood that a serious attempt to tackle inflation would be unpopular with the public and would generate opposition from Congress and the Executive branch. The result was a commitment to the policy of gradualism, under which the Fed would attempt to reduce inflation with mild policies that would not trigger an outright recession, and premature abandonment of anti-inflation policies at the first sign of recession. The Fed managed to disinflate successfully under Chairman Volcker only when the political constraints on Fed policy were lifted after 1979, allowing the Fed to abandon the policy of gradualism and knowingly take actions that risked recession. Evidence for this explanation of Fed behavior is found in Minutes and Transcripts of FOMC meetings and speeches of Fed chairmen.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8694.

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Date of creation: May 2008
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Handle: RePEc:pra:mprapa:8694
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  1. Allan H. Meltzer, 2005. "Origins of the Great Inflation," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 145-176.
  2. Orphanides, Athanasios & Williams, John C., 2004. "The decline of activist stabilization policy: Natural rate misperceptions, learning, and expectations," CFS Working Paper Series 2004/24, Center for Financial Studies (CFS).
  3. Christina D. Romer & David H. Romer, 2002. "The Evolution of Economic Understanding and Postwar Stabilization Policy," NBER Working Papers 9274, National Bureau of Economic Research, Inc.
  4. Athanasios Orphanides, 2002. "Monetary-Policy Rules and the Great Inflation," American Economic Review, American Economic Association, vol. 92(2), pages 115-120, May.
  5. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
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