International Great Inflation and Common Monetary Policy

45 Pages Posted: 26 Jan 2013 Last revised: 11 Dec 2015

See all articles by Jacek Suda

Jacek Suda

Washington University in St. Louis - Department of Economics

Anastasia S. Zervou

Texas A&M University - Department of Economics

Date Written: May 15, 2015

Abstract

The Great Inflation of the 1970s was an international phenomenon. We study whether monetary authorities in the G7 countries were changing their responses to inflation in a similar manner during and following the Great Inflation era. Our results suggest that the common to the G7 countries inflation pattern during the Great Inflation period is associated with a common pattern in the monetary policy response to inflation. Specifically, first, we find that until the early 1980s monetary authorities in the G7 countries responded mildly to inflation and they systematically fought it throughout the 1980s. Second, we find that the estimated Taylor-rule coefficients on inflation are cointegrated, implying the existence of a long run relationship in the responses to inflation, during and right after the Great Inflation period. We interpret these findings as suggestive of common monetary policy patterns. Third, we conduct a principal component analysis on the residuals of the estimated Taylor rules and conclude that the shocks’ structure cannot account enough for the monetary policies’ comovements. Finally, we find that the response to inflation weakens during the 2000s, indicating that after inflation stabilized in low levels, policy makers are not as concerned with it as they were during the 1980s and 1990s.

Keywords: International Monetary Policy, International Great Inflation, Time Varying Parameter Model

JEL Classification: E52, E58, C22

Suggested Citation

Suda, Jacek and Zervou, Anastasia S., International Great Inflation and Common Monetary Policy (May 15, 2015). Available at SSRN: https://ssrn.com/abstract=2207456 or http://dx.doi.org/10.2139/ssrn.2207456

Jacek Suda

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States

Anastasia S. Zervou (Contact Author)

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

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