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A New Look at Historical Monetary Policy and the Great Inflation through the Lens of a Persistence-Dependent Policy Rule


The origins of the Great Inflation, a central 20th century U.S. macroeconomic event, remain contested. Prominent explanations are poor forecasts or deficient activity gap estimates. An alternative view: the FOMC was unwilling to fight inflation, perhaps due to political pressures. Our findings, based on a novel approach, support the latter view. New econometric tools allow us to credibly identify the particular activity gap, if any, in use. Persistence-dependent unemployment (gap) responses in the 1970s were essentially the same pre- and post-Volcker. Conversely, FOMC behavior vis-à-vis inflation—also persistence-dependent—changed markedly starting with Volcker, consistent with (though not proving) the political pressures view.

JEL Classification Codes: E52, C22, C32.
Keywords: Taylor Rule, Great Inflation, Intermediate Target, Natural Rate, Persistence Dependence.


Suggested citation: Ashley, Richard, Kwok Ping Tsang, and Randal J. Verbrugge. 2019. “A New Look at Historical Monetary Policy and the Great Inflation through the Lens of a Persistence-Dependent Policy Rule.” Federal Reserve Bank of Cleveland, Working Paper no. 18-14r. https://doi.org/10.26509/frbc-wp-201814r.

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