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Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s?

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  • Qazi Haque

    (Centre for Applied Macroeconomic Analysis and The University of Western Australia)

  • Nicolas Groshenny

    (Centre for Applied Macroeconomic Analysis and The University of Adelaide)

  • Mark Weder

    (Aarhus University and Centre for Applied Macroeconomic Analysis)

Abstract

The paper re-examines whether the Federal Reserves monetary policy was a source of instability during the Great Inflation by estimating a sticky-price model with positive trend inflation, commodity price shocks and sluggish real wages. Our estimation provides empirical evidence for substantial wage-rigidity and finds that the Federal Reserve responded aggressively to inflation but negligibly to the output gap. In the presence of non-trivial real imperfections and well-identified commodity price-shocks, U.S. data prefers a determinate version of the New Keynesian model: monetary policy-induced indeterminacy and sunspots were not causes of macroeconomic instability during the pre-Volcker era.

Suggested Citation

  • Qazi Haque & Nicolas Groshenny & Mark Weder, 2019. "Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s?," Economics Discussion / Working Papers 19-11, The University of Western Australia, Department of Economics.
  • Handle: RePEc:uwa:wpaper:19-11
    Note: MD5 = b24b4d4a3fbe00474405e52360fa9be8
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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