The Reform of October 1979: How it Happened and Why

97 Pages Posted: 13 May 2005

See all articles by David E. Lindsey

David E. Lindsey

Independent

Athanasios Orphanides

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Asia School of Business

Robert Rasche

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 2005

Abstract

This study offers a historical review of the monetary policy reform of October 6, 1979, and discusses the influences behind it and its significance. We lay out the record from the start of 1979 through the spring of 1980, relying almost exclusively upon contemporaneous sources, including the recently released transcripts of Federal Open Market Committee (FOMC) meetings during 1979. We then present and discuss in detail the reasons for the FOMC's adoption of the reform and the communications challenge presented to the Committee during this period. Further, we examine whether the essential characteristics of the reform were consistent with monetarism, new, neo, or old-fashioned Keynesianism, nominal income targeting, and inflation targeting. The record suggests that the reform was adopted when the FOMC became convinced that its earlier gradualist strategy using finely tuned interest rate moves had proved inadequate for fighting inflation and reversing inflation expectations. The new plan had to break dramatically with established practice, allow for the possibility of substantial increases in short-term interest rates, yet be politically acceptable, and convince financial markets participants that it would be effective. The new operating procedures were also adopted for the pragmatic reason that they would likely succeed.

Keywords: Federal reserve, FOMC, Paul Volcker, monetary reform, operating procedures

JEL Classification: E52, E58, E61, E65

Suggested Citation

Lindsey, David E. and Orphanides, Athanasios and Rasche, Robert, The Reform of October 1979: How it Happened and Why (January 2005). Available at SSRN: https://ssrn.com/abstract=722462

David E. Lindsey

Independent ( email )

Athanasios Orphanides (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=54058

Asia School of Business ( email )

Jalan Kuching, Kuala Lumpur, Wilayah Persekutuan K
Kuala Lumpur, MA
Malaysia

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

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