Keywords: Monetary policy rules, real-time data, Greenbook forecasts, stagflation
Abstract: I estimate a forward-looking monetary policy reaction function
for the Federal Reserve for the periods before and after Paul
Volcker's appointment as Chairman in 1979, using information
that was available to the FOMC in real time from 1966 to 1995.
The results suggest broad similarities in policy and point to
a forward looking approach to policy consistent with a strong
reaction to inflation forecasts during both periods. This
contradicts the hypothesis, based on analysis with ex post
constructed data, that the instability of the Great Inflation
was the result of weak FOMC policy responses to expected
inflation. A difference is that prior to Volcker's appointment,
policy was too activist in reacting to perceived output gaps
that retrospectively proved overambitious. Drawing on
contemporaneous accounts of FOMC policy, I discuss the
implications of the findings for alternative explanations of
the Great Inflation and the improvement in macroeconomic
stability since then.
Full paper (196 KB PDF)
| Full paper (652 KB Postscript)
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