TY - JOUR
T1 - Do we really know that US monetary policy was destabilizing in the 1970s?
AU - Haque, Qazi
AU - Groshenny, Nicolas
AU - Weder, Mark
PY - 2021
Y1 - 2021
N2 - 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.
AB - 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.
U2 - 10.1016/j.euroecorev.2020.103615
DO - 10.1016/j.euroecorev.2020.103615
M3 - Article
SN - 0014-2921
VL - 131
SP - 1
EP - 24
JO - European Economic Review
JF - European Economic Review
ER -