Evolving Post-World War II U.S. Inflation Dynamics

Cogley, Timothy; Sargent, Thomas J.

doi:10.1086/654451

Cited by 641 publications

(578 citation statements)

References 18 publications

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“…As in Rotemberg and Woodford (1997), and Amato and Laubach (2001b), we begin the sample in the first quarter of 1980 because several empirical studies have identified a significant change in monetary policy around that period (see, e.g., Clarida, Galí and Gertler, 2000;Boivin, 2001;Boivin and Giannoni, 2003;Cogley andSargent, 2001, 2002). 34…”

Section: The Effects Of Monetary Disturbancesmentioning

confidence: 99%

Optimal Inflation Targeting Rules

Giannoni¹,

Woodford²

2003

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This paper characterizes optimal monetary policy for a range of alternative economic models in terms of a flexible inflation targeting rule, with a target criterion that depends on the model specification. It shows which forecast horizons should matter, and which variables besides inflation should be taken into account, for each specification.The likely quantitative significance of the various factors considered in the general discussion is then assessed by estimating a small, structural model of the U.S. monetary transmission mechanism with explicit optimizing foundations. An optimal policy rule is computed for the estimated model, and shown to correspond to a multi-stage inflation-forecast targeting procedure.The degree to which actual U.S. policy over the past two decades has conformed to the optimal target criteria is then considered. committed to adjust short-term nominal interest rates periodically so as to ensure that its projection for the economy's evolution satisfies an explicit target criterion -for example, in the case of the Bank of England, the requirement that the RPIX inflation rate be projected to equal 2.5 percent at a horizon two years in the future (Vickers, 1998). Such a commitment can overcome the inflationary bias that is likely to follow from discretionary policy guided solely by a concern for social welfare, and can also help to stabilize medium-term inflation expectations around a level that reduces the output cost to the economy of maintaining low inflation.Another benefit that is claimed for such an approach (e.g., King, 1997; Bernanke et al., 1999)-and an important advantage, at least in principle, of inflation targeting over other policy rules, such as a k-percent rule for monetary growth, that should also achieve a low average rate of inflation -is the possibility of combining reasonable stability of the inflation rate (especially over the medium to long term) with optimal short-run responses to real disturbances of various sorts. Hence Svensson (1999) argues for the desirability of "flexible" inflation targeting, by which it is meant 1 that the target criterion involves not only the projected path of the inflation rate, but one or more other variables, such as a measure of the output gap, as well.We here consider the question of what sort of additional variables ought to matterand with what weights, and what dynamic structure -in a target criterion that is intended to implement optimal policy. We wish to use economic theory to address questions such as which measure of inflation is most appropriately targeted (an index of goods prices only, or wage inflation as well?), which sort of output gap, if any, should justify short-run departures of projected inflation from the long-run target rate (a departure of real GDP from a smooth 1 Svensson discusses two alternative specifications of an inflation-targeting policy rule, one of which (a "general targeting rule") involves specification of a loss function that the central bank should use to evaluate alternative paths for the e...

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Section: The Effects Of Monetary Disturbancesmentioning

confidence: 99%

Optimal Inflation Targeting Rules

Giannoni¹,

Woodford²

2003

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“…Specifically, following Orphanides and Williams (2005b), we posit that private agents engage in perpetual learning, that is, they reestimate their forecasting model using a constant-gain least squares algorithm that weights recent data more heavily than past data. (See Sargent, 1999;Cogley and Sargent, 2001;and Evans and Honkapohja, 2001 for related treatments of learning.) This approach to modeling learning allows for the possible presence of time variation in the economy, including the natural rates of interest and unemployment.…”

Section: Expectations and Simulation Methodsmentioning

confidence: 99%

Monetary Policy Mistakes and the Evolution of Inflation Expectations

Orphanides¹,

Williams

2011

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What monetary policy framework, if adopted by the Federal Reserve, would have avoided the Great Inflation of the 1960s and 1970s? We use counterfactual simulations of an estimated model of the U.S. economy to evaluate alternative monetary policy strategies. We show that policies constructed using modern optimal control techniques aimed at stabilizing inflation, economic activity, and interest rates would have succeeded in achieving a high degree of economic stability as well as price stability only if the Federal Reserve had possessed excellent information regarding the structure of the economy or if it had acted as if it placed relatively low weight on stabilizing the real economy. Neither condition held true. We document that policymakers at the time both had an overly optimistic view of the natural rate of unemployment and put a high priority on achieving full employment. We show that in the presence of realistic informational imperfections and with an emphasis on stabilizing economic activity, an optimal control approach would have failed to keep inflation expectations well anchored, resulting in high and highly volatile inflation during the 1970s. Finally, we show that a strategy of following a robust first-difference policy rule would have been highly effective at stabilizing inflation and unemployment in the presence of informational imperfections. This robust monetary policy rule yields simulated outcomes that are close to those seen during the period of the Great Moderation starting in the mid-1980s.

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“…In principle, these zero restrictions may help or hinder the forecasting performance of agents in the model. In practice, allowing agents to include 13 See also Sargent (1999), Cogley and Sargent (2001), Evans and Honkapohja (2001), Gaspar and Smets (2002), and Gaspar, Smets and Vestin (2006) Thus, by imposing this structure, we are likely erring on the side of understating the costs of learning on macroeconomic performance.…”

Section: Perpetual Learning With Least Squaresmentioning

confidence: 99%

Robust monetary policy with imperfect knowledge

Orphanides

Williams

2007

Journal of Monetary Economics

163

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Evolving Post-World War II U.S. Inflation Dynamics

Cited by 641 publications

References 18 publications

Optimal Inflation Targeting Rules

Optimal Inflation Targeting Rules

Monetary Policy Mistakes and the Evolution of Inflation Expectations

Robust monetary policy with imperfect knowledge

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