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Indeterminacy and Learning: An Analysis of Monetary Policy in the Great Inflation

Author

Listed:
  • Christian Matthes

    (Universitat Pompeu Fabra)

  • Thomas Lubik

    (Federal Reserve Bank of Richmond)

Abstract

We estimate the full model using Bayesian methods and allow for both determinate and indeterminate equilibria. Our estimates of the resulting equilibria during the Great Inflation of the 1970s reveal that the Fed’s optimal policy response was seen by the private sector as leading to an indeterminate equilibrium although it was based on mismeasured data, not a deliberately soft policy response. Whereas, the Volcker disinflation suffered from fewer measurement issues and quickly led the Fed to a determinate policy path.

Suggested Citation

  • Christian Matthes & Thomas Lubik, 2013. "Indeterminacy and Learning: An Analysis of Monetary Policy in the Great Inflation," 2013 Meeting Papers 973, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:973
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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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