Book contents
- Frontmatter
- Contents
- Figures
- Preface
- 1 The Pragmatic Evolution of the Monetary Standard
- 2 Learning and Policy Ambiguity
- 3 From Gold to Fiat Money
- 4 From World War II to the Accord
- 5 Martin and Lean-against-the-Wind
- 6 Inflation Is a Nonmonetary Phenomenon
- 7 The Start of the Great Inflation
- 8 Arthur Burns and Richard Nixon
- 9 Bretton Woods
- 10 Policy in the Ford Administration
- 11 Carter, Burns, and Miller
- 12 The Political Economy of Inflation
- 13 The Volcker Disinflation
- 14 Monetary Policy after the Disinflation
- 15 Greenspan's Move to Price Stability
- 16 International Bailouts and Moral Hazard
- 17 Monetary Policy Becomes Expansionary
- 18 Departing from the Standard Procedures
- 19 Boom and Bust: 1997 to 2001
- 20 Backing Off from Price Stability
- 21 The Volcker–Greenspan Regime
- 22 The Fed: Inflation Fighter or Inflation Creator?
- 23 The Stop–Go Laboratory
- 24 Stop–Go and Interest Rate Inertia
- 25 Monetary Nonneutrality in the Stop–Go Era
- 26 A Century of Monetary Experiments
- Appendix: Data Seen by FOMC for the Stop–Go Period Shown in Figures 24.1, 24.2, and 24.3
- Notes
- Bibliography
- Index
- Titles in the series
22 - The Fed: Inflation Fighter or Inflation Creator?
Published online by Cambridge University Press: 26 May 2010
- Frontmatter
- Contents
- Figures
- Preface
- 1 The Pragmatic Evolution of the Monetary Standard
- 2 Learning and Policy Ambiguity
- 3 From Gold to Fiat Money
- 4 From World War II to the Accord
- 5 Martin and Lean-against-the-Wind
- 6 Inflation Is a Nonmonetary Phenomenon
- 7 The Start of the Great Inflation
- 8 Arthur Burns and Richard Nixon
- 9 Bretton Woods
- 10 Policy in the Ford Administration
- 11 Carter, Burns, and Miller
- 12 The Political Economy of Inflation
- 13 The Volcker Disinflation
- 14 Monetary Policy after the Disinflation
- 15 Greenspan's Move to Price Stability
- 16 International Bailouts and Moral Hazard
- 17 Monetary Policy Becomes Expansionary
- 18 Departing from the Standard Procedures
- 19 Boom and Bust: 1997 to 2001
- 20 Backing Off from Price Stability
- 21 The Volcker–Greenspan Regime
- 22 The Fed: Inflation Fighter or Inflation Creator?
- 23 The Stop–Go Laboratory
- 24 Stop–Go and Interest Rate Inertia
- 25 Monetary Nonneutrality in the Stop–Go Era
- 26 A Century of Monetary Experiments
- Appendix: Data Seen by FOMC for the Stop–Go Period Shown in Figures 24.1, 24.2, and 24.3
- Notes
- Bibliography
- Index
- Titles in the series
Summary
After 1983, high, variable inflation gave way to low, stable inflation while real output became less variable. Section I advances the “inflation-fighter” explanation of this result. Inflation arose in the 1970s because the FOMC responded only halfheartedly to inflation shocks. The subsequent decline in real variability arose from a decline in inflation shocks.
Section II advances the “inflation-creator” view, which emphasizes how discretion in the 1970s destroyed nominal expectational stability. Subsequent rule-like behavior restored it. The resulting discipline imposed on funds rate changes caused the yield curve to move in a way that replaced the alternation of periods of contractionary and expansionary monetary policy with a neutral policy that turned economic stabilization over to the price system (Hetzel 2006). An appendix argues that the Taylor Rule fails to offer a useful framework for understanding monetary policy.
The Fed as Inflation Fighter
The inflation-fighter view is in a traditional Keynesian spirit, which emphasizes a Phillips curve with inertia in inflationary expectations that exists independently of monetary policy. This inertia, reflected in expectations based on realized inflation, propagates inflation shocks. Consistent with the belief that the FOMC can predictably manipulate real variables, inflation arises when the central bank fails to raise the real interest rate and the unemployment rate sufficiently to offset such shocks.
Blinder and Reis (2005, 16) exposit this view:
[T]he expected inflation rate … is a slow-moving state variable rather than a fast-moving “jump” variable. So when the FOMC sets the nominal federal funds rate …, it … also sets the real federal funds rate. …[…]
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- The Monetary Policy of the Federal ReserveA History, pp. 272 - 279Publisher: Cambridge University PressPrint publication year: 2008