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Did the Great Inflation Occur Despite Policymaker Commitment to a Taylor Rule?

  • James Bullard
  • Stefano Eusepi

The authors study the hypothesis that misperceptions of trend productivity growth during the onset of the productivity slowdown in the United States caused much of the great inflation of the 1970s. They use the general equilibrium, sticky price framework of Woodford (2002), augmented with learning using the techniques of Evans and Honkapohja (2001). The authors allow for endogenous investment as well as explicit, exogenous growth in productivity and the labor input. They assume the monetary policymaker is committed to using a Taylor-type policy rule. The authors study how this economy reacts to an unexpected change in the trend productivity growth rate under learning. They find that a substantial portion of the observed increase in inflation during the 1970s can be attributed to this source.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2003 with number 129.

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Date of creation: 01 Aug 2003
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Handle: RePEc:sce:scecf3:129
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  1. Cho, In-Koo & Sargent, Thomas J., 2000. "Escaping Nash inflation," Working Paper Series 0023, European Central Bank.
  2. George W. Evans & Seppo Honkapohja, 2001. "Expectations and the Stability Problem for Optimal Monetary Policies," University of Oregon Economics Department Working Papers 2001-6, University of Oregon Economics Department, revised 03 Aug 2001.
  3. Ireland, Peter N., 1999. "Does the time-consistency problem explain the behavior of inflation in the United States?," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 279-291, October.
  4. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation Traps and Monetary Policy," Review of Economic Studies, Wiley Blackwell, vol. 70(4), pages 715-741, October.
  5. William Poole, 1999. "Monetary policy rules?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 3-12.
  6. Thomas Sargent & Noah Williams & Tao Zha, 2009. "The Conquest of South American Inflation," Journal of Political Economy, University of Chicago Press, vol. 117(2), pages 211-256, 04.
  7. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  8. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  9. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
  10. Alex Cukierman & Francesco Lippi, 2004. "Endogenous monetary policy with unobserved potential output," Temi di discussione (Economic working papers) 493, Bank of Italy, Economic Research and International Relations Area.
  11. Bullard, James & Cho, In-Koo, 2005. "Escapist policy rules," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1841-1865, November.
  12. Miguel Casares & Bennett T. McCallum, 2000. "An Optimizing IS-LM Framework with Endogenous Investment," NBER Working Papers 7908, National Bureau of Economic Research, Inc.
  13. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-39, March.
  14. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  15. James B. Bullard & John Duffy, 2004. "Learning and structural change in macroeconomic data," Working Papers 2004-016, Federal Reserve Bank of St. Louis.
  16. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
  17. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, January.
  18. Bruce E. Hansen, 2001. "The New Econometrics of Structural Change: Dating Breaks in U.S. Labour Productivity," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 117-128, Fall.
  19. Sbordone, Argia M., 2002. "Prices and unit labor costs: a new test of price stickiness," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 265-292, March.
  20. William Poole, 2002. "Flation," Speech 49, Federal Reserve Bank of St. Louis.
  21. Chan G. Huh & Kevin J. Lansing, 1998. "Expectations, credibility, and disinflation in a small macroeconomic model," Working Papers in Applied Economic Theory 98-01, Federal Reserve Bank of San Francisco.
  22. Orphanides, Athanasios, 2001. "Monetary policy rules, macroeconomic stability and inflation: a view from the trenches," Working Paper Series 0115, European Central Bank.
  23. Christopher J. Erceg & Andrew T. Levin, 2001. "Imperfect credibility and inflation persistence," Finance and Economics Discussion Series 2001-45, Board of Governors of the Federal Reserve System (U.S.).
  24. Bullard, J. & Schaling, E., 2000. "New Economy - New Policy Rules?," Discussion Paper 2000-72, Tilburg University, Center for Economic Research.
  25. Martin Eichenbaum & Jonas D.M. Fisher, 2003. "Evaluating the Calvo model of sticky prices," Working Paper Series WP-03-23, Federal Reserve Bank of Chicago.
  26. Preston, Bruce, 2008. "Adaptive learning and the use of forecasts in monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3661-3681, November.
  27. Nelson, Edward & Nikolov, Kalin, 2004. "Monetary Policy and Stagflation in the UK," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 293-318, June.
  28. John B. Taylor, 1998. "Staggered Price and Wage Setting in Macroeconomics," NBER Working Papers 6754, National Bureau of Economic Research, Inc.
  29. Christopher J. Erceg, 1997. "Nominal wage rigidities and the propagation of monetary disturbances," International Finance Discussion Papers 590, Board of Governors of the Federal Reserve System (U.S.).
  30. Athanasios Orphanides, 2002. "Monetary policy rules and the Great Inflation," Finance and Economics Discussion Series 2002-8, Board of Governors of the Federal Reserve System (U.S.).
  31. Bai, Jushan & Lumsdaine, Robin L & Stock, James H, 1998. "Testing for and Dating Common Breaks in Multivariate Time Series," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 395-432, July.
  32. repec:dgr:kubcen:200072 is not listed on IDEAS
  33. Andrea Tambalotti, 2004. "Optimal monetary policy and productivity growth," Money Macro and Finance (MMF) Research Group Conference 2003 99, Money Macro and Finance Research Group.
  34. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
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