Would the Bundesbank Have Prevented the Great Inflation in the United States?

Abstract

Policy counterfactuals based on estimated structural VARs routinely suggest that bringing Alan Greenspan back in the 1970s’ United States would not have prevented the Great Inflation. We show that a standard policy counterfactual suggests that the Bundesbank – which is near-universally credited for sparing West Germany the Great Inflation – would also not have been able to prevent the Great Inflation in the United States. The sheer implausibility of this result sounds a cautionary note on taking the outcome of SVAR-based policy counterfactuals at face value, and raises questions on the very reliability of such exercises.

Keywords: Bayesian VARs, time-varying parameters, stochastic volatility, identified VARs, Great Inflation, policy counterfactuals

JEL Classification: E32, E47, E52, E58