Three Great American Disinflations

43 Pages Posted: 23 Mar 2007

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Christopher J. Erceg

Board of Governors of the Federal Reserve System

Andrew T. Levin

affiliation not provided to SSRN

Ryan Michaels

University of Michigan at Ann Arbor - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2007

Abstract

This paper analyzes the role of transparency and credibility in accounting for the widely divergent macroeconomic effects of three episodes of deliberate monetary contraction: the post-Civil War deflation, the post-WWI deflation, and the Volcker disinflation. Using a dynamic general equilibrium model in which private agents use optimal filtering to infer the central bank's nominal anchor, we demonstrate that the salient features of these three historical episodes can be explained by differences in the design and transparency of monetary policy, even without any time variation in economic structure or model parameters. For a policy regime with relatively high credibility, our analysis highlights the benefits of a gradualist approach (as in the 1870s) rather than a sudden change in policy (as in 1920-21). In contrast, for a policy institution with relatively low credibility (such as the Federal Reserve in late 1980), an aggressive policy stance can play an important signalling role by making the policy shift more evident to private agents.

Suggested Citation

Bordo, Michael D. and Erceg, Christopher J. and Levin, Andrew and Michaels, Ryan F., Three Great American Disinflations (March 2007). NBER Working Paper No. w12982. Available at SSRN: https://ssrn.com/abstract=975923

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christopher J. Erceg

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2575 (Phone)
202-736-5638 (Fax)

Andrew Levin

affiliation not provided to SSRN

Ryan F. Michaels

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
40
Abstract Views
596
PlumX Metrics