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Working Paper

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.

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