Work

Do We Really Know that US Monetary Policy Was Destabilizing in the 1970s?

Year: 2018

Type: article

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.

Source: European Economic Review

DOI: 10.1016/j.euroecorev.2020.103615

Authors: Qazi Haque, Nicolas Groshenny, Mark Weder

Institutions: The University of Western Australia, The University of Adelaide, Aarhus University

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funders: University of Oxford, Keio University, University of Adelaide, Australian Research Council

Awards: The Allocation of Risk and Economic Slumps, Measuring the effect of monetary policy on the economy