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Monetary Policy and Inflation in the 70s

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  • FABRICE COLLARD
  • HARRIS DELLAS

Abstract

An influential paper by Clarida, GalÌ, and Gertler (2000) has attributed the great inflation of the 1970s to the violation of the Taylor principle in the conduct of U.S. monetary policy (weak, indeterminacy inducing response to expected inflation). We evaluate this thesis in the context of a standard New Keynesian model against a version of the model that incorporates incomplete information learning about the true state of the economy. The likelihood-based estimation of the model overwhelmingly favors the specification with indeterminacy over the alternatives with determinacy, independent of the presence and size of misperceptions. Copyright (c) 2008 The Ohio State University.

Suggested Citation

  • Fabrice Collard & Harris Dellas, 2008. "Monetary Policy and Inflation in the 70s," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1765-1781, December.
    • Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:8:p:1765-1781
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    References listed on IDEAS

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    1. Giorgio E. Primiceri, 2006. "Why Inflation Rose and Fell: Policy-Makers' Beliefs and U. S. Postwar Stabilization Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(3), pages 867-901.
    2. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    3. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
    4. James Bullard & Stefano Eusepi, 2005. "Did the Great Inflation Occur Despite Policymaker Commitment to a Taylor Rule?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 324-359, April.
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    6. Fabio Milani, 2006. "A Bayesian DSGE Model with Infinite-Horizon Learning: Do "Mechanical" Sources of Persistence Become Superfluous?," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
    7. Fabrice Collard & Harris Dellas, 2007. "The Great Inflation of the 1970s," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2‐3), pages 713-731, March.
    8. Orphanides, Athanasios, 2004. "Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 151-175, April.
    9. Cukierman, Alex & Lippi, Francesco, 2005. "Endogenous monetary policy with unobserved potential output," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1951-1983, November.
    10. Nelson, Edward & Nikolov, Kalin, 2004. "Monetary Policy and Stagflation in the UK," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 293-318, June.
    11. John Geweke, 1999. "Using Simulation Methods for Bayesian Econometric Models," Computing in Economics and Finance 1999 832, Society for Computational Economics.
    12. Svensson, Lars E. O. & Woodford, Michael, 2003. "Indicator variables for optimal policy," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 691-720, April.
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