The Great Inflation: Did the Shadow Know Better?

53 Pages Posted: 28 Mar 2011 Last revised: 16 Sep 2022

See all articles by William Poole

William Poole

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Robert Rasche

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

David C. Wheelock

Federal Reserve Bank of St. Louis - Research Division

Date Written: March 2011

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. This 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 less variability in inflation or output than a one-time reduction in monetary growth. We conclude that the Shadow articulated a policy that would have outperformed the policies actually implemented by the Federal Reserve during the Great Inflation era.

Suggested Citation

Poole, William and Rasche, Robert and Wheelock, David C., The Great Inflation: Did the Shadow Know Better? (March 2011). NBER Working Paper No. w16910, Available at SSRN: https://ssrn.com/abstract=1795859

William Poole

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
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

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

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

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