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Did the Great Inflation Occur Despite Policymaker Commitment to a Taylor Rule?

Author

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  • James Bullard

    (Federal Reserve Bank of St. Louis)

  • Stefano Eusepi

    (Federal Reserve Bank of New York)

Abstract

We study the hypothesis that misperceptions of trend productivity growth during the onset of the productivity slowdown in the U.S. caused much of the great inflation of the 1970s. We use the general equilibrium, sticky price framework of Woodford (2003), augmented with learning using the techniques of Evans and Honkapohja (2001). We allow for endogenous investment as well as explicit, exogenous growth in productivity and the labor input. We assume the monetary policymaker is committed to using a Taylor type policy rule. We study how this economy reacts to an unexpected change in the trend productivity growth rate under learning. We find that a substantial portion of the observed increase in inflation during the 1970s can be attributed to this source. (Copyright: Elsevier)

Suggested Citation

  • 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.
    • Handle: RePEc:red:issued:v:8:y:2005:i:2:p:324-359
    DOI: 10.1016/j.red.2005.01.003
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    More about this item

    Keywords

    Monetary policy rules; productivity slowdown; learning;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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