Do we really know that US monetary policy was destabilizing in the 1970s?

Qazi Haque, Nicolas Groshenny, Mark Weder

    Research output: Contribution to journalArticle

    Abstract

    The paper re-examines whether the Federal Reserve's 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. However, had the Federal Reserve in the Seventies followed the policy rule of the Volcker-Greenspan-Bernanke period, inflation volatility would have been lower by one third. (C) 2020 Elsevier B.V. All rights reserved.
    Original languageEnglish
    Pages (from-to)1-24
    JournalEuropean Economic Review
    Volume131
    DOIs
    Publication statusPublished - 2021

    Fingerprint

    Dive into the research topics of 'Do we really know that US monetary policy was destabilizing in the 1970s?'. Together they form a unique fingerprint.

    Cite this