Managing a New Policy Framework: Paul Volcker, the St. Louis Fed, and the 1979-82 War on Inflatin

32 Pages Posted: 24 Jul 2020

See all articles by Kevin L. Kliesen

Kevin L. Kliesen

Federal Reserve Bank of St. Louis - Research Division

David C. Wheelock

Federal Reserve Bank of St. Louis - Research Division

Date Written: July, 2020

Abstract

In October 1979, Federal Reserve Chairman Paul Volcker persuaded his FOMC colleagues to adopt a new policy framework that i) accepted responsibility for controlling inflation and ii) implemented new operating procedures to control the growth of monetary aggregates in an effort to restore price stability. These moves were strongly supported by monetarist-oriented economists, including the leadership and staff of the Federal Reserve Bank of St. Louis. The next three years saw inflation peak and then fall sharply, but also two recessions and considerable volatility in interest rates and money supply growth rates. This article reviews the episode through the lens of speeches and FOMC meeting statements of Volcker and St. Louis Fed president Lawrence Roos, and articles by Roos’ staff. The FOMC adopted monetarist principles to establish the Fed’s anti-inflation credibility but Volcker was willing to accept deviations of money growth from the FOMC’s targets, unlike Roos, who viewed the targets as sacrosanct. The FOMC abandoned monetary aggregates in October 1982, but preserved the Fed’s commitment to price stability. The episode illustrates how Volcker used a change in operating procedures to alter policy fundamentally, and later adapt the procedures to changed circumstances without abandoning the foundational features of the policy.

Keywords: Federal Open Market Committee, monetary policy, money supply, inflation, recession, monetarism

JEL Classification: E42, E52, E58, N22

Suggested Citation

Kliesen, Kevin L. and Wheelock, David C., Managing a New Policy Framework: Paul Volcker, the St. Louis Fed, and the 1979-82 War on Inflatin (July, 2020). FRB St. Louis Working Paper No. 2020-022, Available at SSRN: https://ssrn.com/abstract=3659526 or http://dx.doi.org/10.20955/wp.2020.022

Kevin L. Kliesen (Contact Author)

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

411 Locust St
Saint Louis, MO 63011
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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