The Great Inflation: Did the Shadow Know Better?

Federal Reserve Bank of St. Louis Working Paper No. 2008-32B

93 Pages Posted: 5 Sep 2008 Last revised: 23 Dec 2009

See all articles by William Poole

William Poole

University of Delaware - Economics; Cato Institute; Merk Investments

Robert Rasche

Michigan State University; National Bureau of Economic Research (NBER)

David C. Wheelock

Federal Reserve Bank of St. Louis - Research Division

Date Written: November 3, 2009

Abstract

The Shadow Open Market Committee was formed in 1973 in response to rising inflation and the apparent unwillingness of U.S. policymakers to implement policies necessary to maintain price stability. This paper describes how the Committee's policy views differed from those of most Federal Reserve officials and many academic economists at the time. The Shadow argued that price stability should be the primary goal of monetary policy, and favored gradual adjustment of monetary growth to a rate consistent with price stability. The paper evaluates the Shadow's policy rule in the context of the New Keynesian macroeconomic model of Clarida, Gali and Gertler (1999). Simulations of the model suggest that the gradual stabilization of monetary growth favored by the Shadow would have lowered inflation with less impact on output growth, and with less variability in output and inflation, than a one-time reduction in monetary growth. We conclude that the Shadow articulated a sensible policy that would have outperformed the policies actually implemented by the Federal Reserve during the Great Inflation era.

Keywords: Great Inflation, Shadow Open Market Committee, monetary policy, policy rules

JEL Classification: B22, E31, E52, E58, N12

Suggested Citation

Poole, William and Rasche, Robert and Wheelock, David C., The Great Inflation: Did the Shadow Know Better? (November 3, 2009). Federal Reserve Bank of St. Louis Working Paper No. 2008-32B, Available at SSRN: https://ssrn.com/abstract=1263370 or http://dx.doi.org/10.2139/ssrn.1263370

William Poole

University of Delaware - Economics ( email )

Newark, DE 19716
United States

Cato Institute

1000 Massachusetts Avenue, N.W.
Washington, DC 20001-5403
United States

Merk Investments

United States

Robert Rasche

Michigan State University ( email )

East Lansing, MI 48824
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David C. Wheelock (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States

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