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Supply Shocks and the Persistence of Inflation

  • Martin Sommer

    (International Monetary Fund)

This paper examines the long-run effects of supply shocks (such as oil shocks) on inflation in the United States. The persistence of supply shocks in U.S. inflation fell considerably during the period of Volcker’s disinflation (1979-1982). My empirical results suggest that the difference between the pre-Volcker and post-Volcker periods is attributable to the change in the behavior of inflation expectations - agents expected shocks to persist in the pre-Volcker period, but not in the post-Volcker period. I construct a simple model of how different monetary policies lead to different persistence equilibria.

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File URL: http://econwpa.repec.org/eps/mac/papers/0408/0408005.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0408005.

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Length: 44 pages
Date of creation: 09 Aug 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0408005
Note: Type of Document - pdf; pages: 44
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Christina D. Romer and David H. Romer., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Economics Working Papers 89-107, University of California at Berkeley.
  2. 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.
  3. Donald W.K. Andrews & Inpyo Lee & Werner Ploberger, 1992. "Optimal Changepoint Tests for Normal Linear Regression," Cowles Foundation Discussion Papers 1016, Cowles Foundation for Research in Economics, Yale University.
  4. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  5. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  6. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc.
  7. Lawrence J. Christiano & Christopher J. Gust, 2000. "The Expectations Trap Hypothesis," NBER Working Papers 7809, National Bureau of Economic Research, Inc.
  8. Laurence Ball & N. Gregory Mankiw, 1993. "Relative-price changes as aggregate supply shocks," Working Papers 93-13, Federal Reserve Bank of Philadelphia.
  9. Orphanides, Athanasios & Wilcox, David W, 2002. "The Opportunistic Approach to Disinflation," International Finance, Wiley Blackwell, vol. 5(1), pages 47-71, Spring.
  10. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
  11. Robert B. Barsky & Lutz Kilian, 2002. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 137-198 National Bureau of Economic Research, Inc.
  12. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 297-346.
  13. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1.
  14. Martin Feldstein, 2000. "Aspects of Global Economic Intergration: Outlook for the Future," NBER Working Papers 7899, National Bureau of Economic Research, Inc.
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