Do we really know that U.S. monetary policy was destabilizing in the 1970s?

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Title: Do we really know that U.S. monetary policy was destabilizing in the 1970s?
Author: Haque, Qazi ; Groshenny, Nicolas ; Weder, Mark
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 20/2019
Year of publication: 2019
Publication date: 11.9.2019
Pages: 62
Subject (yso): rahapolitiikka; inflaatio; palkat; hinnat; tuotanto
Keywords: Yhdysvallat; tuotantokuilu
JEL: E32; E52; E58
Other keywords: Monetary policy; Trend inflation; Great In flation; Cost-push shocks; Indeterminacy; Wage sluggishnes; Sequential Monte Carlo algorithm
Abstract: The paper re-examines whether the Federal Reserve’s monetary policy was a source of instability during the Great Inflation by estimating a sticky-price model with positive trend inflation, commodity price shocks and sluggish real wages. Our estimation provides empirical evidence for substantial wage-rigidity and finds that the Federal Reserve responded aggressively to inflation but negligibly to the output gap. In the presence of non-trivial real imperfections and well-identified commodity price-shocks, U.S. data prefers a determinate version of the New Keynesian model: monetary policy-induced indeterminacy and sunspots were not causes of macroeconomic instability during the pre-Volcker era.

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