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Did Time Inconsistency Contribute To The Great Inflation? Evidence From The Fomc Transcripts

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  • Henry W. Chappell
  • Rob Roy McGregor

Abstract

We use evidence from detailed records of FOMC deliberations to argue that time inconsistency theory can help explain the excessive monetary expansion that characterized Arthur Burns's tenure as Federal Reserve Chairman (1970–1978). The records suggest that the Fed perceived a Phillips curve tradeoff and political pressures that made it difficult to adopt disinflationary policies; the tendency toward excessively expansionary policy was exacerbated by the short‐run planning horizon the Committee faced in each of its meetings. We argue that comparative static predictions of the time inconsistency model are consistent with the rise of inflation during the Burns years and its subsequent fall.

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  • Henry W. Chappell & Rob Roy McGregor, 2004. "Did Time Inconsistency Contribute To The Great Inflation? Evidence From The Fomc Transcripts," Economics and Politics, Wiley Blackwell, vol. 16(3), pages 233-251, November.
    • Handle: RePEc:bla:ecopol:v:16:y:2004:i:3:p:233-251
    DOI: 10.1111/j.1468-0343.2004.00139.x
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    References listed on IDEAS

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    Cited by:

    1. Gbaguidi DAVID, 2011. "Expectations Impact On The Effectiveness Of The Inflation-Real Activity Trade-Off," Theoretical and Practical Research in the Economic Fields, ASERS Publishing, vol. 2(2), pages 141-181.
    2. Peter N. Ireland, 2007. "Changes in the Federal Reserve's Inflation Target: Causes and Consequences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1851-1882, December.
    3. Gbaguidi, David Sedo, 2011. "Regime Switching in a New Keynesian Phillips Curve with Non-zero Steady-state Inflation Rate," MPRA Paper 35481, University Library of Munich, Germany.
    4. Brian Snowdon, 2007. "The New Classical Counter-Revolution: False Path or Illuminating Complement?," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 541-562, Fall.
    5. Gbaguidi, David, 2012. "La courbe de Phillips : temps d’arbitrage et/ou arbitrage de temps," L'Actualité Economique, Société Canadienne de Science Economique, vol. 88(1), pages 87-119, mars.
    6. Selgin, George & Lastrapes, William D. & White, Lawrence H., 2012. "Has the Fed been a failure?," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 569-596.

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