Weise, Charles L (2008): Political constraints on monetary policy during the Great Inflation.
Download (411kB) | Preview
The U.S. Great Inflation of the 1970s was characterized by repeated, failed attempts at disinflation by the Federal Reserve as well as periods of inaction despite rising inflation. Previous research has attributed these failures to policymakers’ “misperceptions” about monetary policy and the macroeconomy. This paper argues instead that the Fed’s behavior during this period can be explained as a response to political constraints. Members of the Fed understood that a serious attempt to tackle inflation would be unpopular with the public and would generate opposition from Congress and the Executive branch. The result was a commitment to the policy of gradualism, under which the Fed would attempt to reduce inflation with mild policies that would not trigger an outright recession, and premature abandonment of anti-inflation policies at the first sign of recession. The Fed managed to disinflate successfully under Chairman Volcker only when the political constraints on Fed policy were lifted after 1979, allowing the Fed to abandon the policy of gradualism and knowingly take actions that risked recession. Evidence for this explanation of Fed behavior is found in Minutes and Transcripts of FOMC meetings and speeches of Fed chairmen.
|Item Type:||MPRA Paper|
|Original Title:||Political constraints on monetary policy during the Great Inflation|
|Keywords:||Great Inflation; monetary policy; Federal Reserve|
|Subjects:||E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General
|Depositing User:||Charles L. Weise|
|Date Deposited:||09. May 2008 17:51|
|Last Modified:||18. Feb 2013 15:59|
Burns Arthur F., 1970, “Inflation: The Fundamental Challenge to Stabilization Policies,” Remarks before the Seventeenth Annual Monetary Conference of the American Bankers Association, Hot Springs, Virginia, May 18.
__________, 1972, “The Problem of Inflation,” Address before the Joint Luncheon Meeting of the American Economic Association and the American Finance Association, Toronto, Ontario, Canada, December 29.
__________, 1973, “Some Problems of Central Banking,” Address before the 1973 International Monetary Conference, Paris, France, June 6.
__________, 1974, Statement before the Committee on Banking and Currency, U.S. House of Representatives, July 30.
__________, 1977, “The Importance of an Independent Central Bank,” Address at the Commencement Exercises of Jacksonville University, Jacksonville, Florida, August 13.
__________, 1979, “The Anguish of Central Banking,” Belgrade, Yugoslavia: Per Jacobsson Foundation.
DeLong, Bradford J., 1997, “America’s Peacetime Inflation: The 1970s,” in Christina D. Romer and David H. Romer (eds.), Reducing Inflation: Motivation and Strategy, University of Chicago Press.
Ehrlichman, John, 1982, Witness to Power: The Nixon Years, New York: Simon and Schuster.
Kettl, Donald F., 1986, Leadership at the Fed, New Haven: Yale University Press.
Meltzer, Allan H., 2005, “The Origins of the Great Inflation,” Federal Reserve of St. Louis Review, March/April Part 2, 145-175.
Miller, G. William, 1978a, Statement before the Committee on Banking, Housing and Urban Affairs, United States Senate, April 25.
__________, 1978b, “Semi-Annual Report on Monetary Policy,” Statement before the Committee on Banking, Finance and Urban Affairs. House of Representatives, July 28.
__________, 1978c, “New Directions in U.S. Economic Policy,” Address at Atlantic Bridge, Frankfurt, Germany, December 12.
__________, 1979, “New Directions: Strategy for Economic Progress,” July 19, 1979.
Nelson, Edward, “The Great Inflation of the 1970s: What Really Happened?” Federal Reserve Bank of St. Louis Working Paper, 2005.
Orphanides, Athanasios, 2002, “Monetary Policy Rules and the Great Inflation," American Economic Review 92(2), 115-120.
Orphanides, Athanasios, 2003, “Historical Monetary Policy Analysis and the Taylor Rule,” Journal of Monetary Economics 50(5), 983-1022.
Orphanides, Athanasios, 2004, “Monetary Policy Rules, Macroeconomic Stability and Inflation: A View from the Trenches,” Journal of Money, Credit and Banking 36(2), 151-175.
Orphanides, Athanasios, and John C. Williams, 2004, “The Decline of Activist Stabilization Policy: Natural Rate Misperceptions, Learning, and Expectations,” European Central Bank Working Paper No. 337.
Romer, Christina D. and David H. Romer, 2002, “The Evolution of Economic Understanding and Postwar Stabilization Policy,” NBER Working Paper No. 9274.
Volcker, Paul A., 1979, Transcript of Press Conference with Paul A. Volcker, Chairman, Board of Governors of the Federal Reserve System, American Bankers Association Annual Convention, New Orleans, Louisiana, October 9.
__________, 1980, Statement before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, November 19.
__________, 1981, “No Time for Backsliding,” Remarks before the National Press Club, Washington, D.C., September 25.
Wells, Wyatt C., 1994, Economist in an Uncertain World: Arthur F. Burns and the Federal Reserve, 1970-78, New York: Columbia University Press.