NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Falling Behind the Curve: A Positive Analysis of Stop-Start Monetary Policies and the Great Inflation

Andrew Levin, John B. Taylor

Chapter in NBER book The Great Inflation: The Rebirth of Modern Central Banking (2013), Michael D. Bordo and Athanasios Orphanides, editors (p. 217 - 244)
Conference held September 25-27, 2008
Published in June 2013 by University of Chicago Press
© 2013 by the National Bureau of Economic Research

This chapter examines the evolution of long-run inflation expectations and models the stance of US monetary policy from 1960 to 1980. It begins by considering several distinct measures of long-run inflation expectations, which indicate that such expectations rose markedly during the late 1960s, remained elevated at that plateau through the mid-1970s, and then rose at an alarming pace from 1977 until mid-1980. The chapter then considers the stance of monetary policy in terms of the ex ante short-term real interest rate; that is, the federal funds rate less the Livingston Survey of one-year-ahead expected inflation. Next, it analyzes the behavior of real interest rates and shows that the course of monetary policy during the Great Inflation period can be represented as a series of stop-start episodes which occurred in 1968 to 1970, 1974 to 1976, and 1979 to 1980. In each case, policy tightening induced a contraction in economic activity, but that policy was not maintained long enough to induce a sustained decline in the inflation rate.

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This paper was revised on January 6, 2015

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This chapter first appeared as NBER working paper w15630, Falling Behind the Curve: A Positive Analysis of Stop-Start Monetary Policies and the Great Inflation, Andrew Levin, John B. Taylor
Commentary on this chapter:
  Discussion, Michael D. Bordo, Athanasios Orphanides
  Comment, Bennett T. McCallum
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