TY  - JOUR
AU  - Sargent,Thomas
AU  - Williams,Noah
AU  - Zha,Tao
TI  - Shocks and Government Beliefs: The Rise and Fall of American Inflation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10764
PY  - 2004
Y2  - September 2004
UR  - http://www.nber.org/papers/w10764
L1  - http://www.nber.org/papers/w10764.pdf
N1  - Author contact info:
Thomas J. Sargent
Department of Economics
New York University
19 W. 4th Street, 6th Floor
New York, NY  10012
Tel: 612/373-4383
Fax: 650/723-1687
E-Mail: thomas.sargent@nyu.edu

Noah M. Williams
Department of Economics
1180 Observatory Drive
University of Wisconsin
Madison, WI 53706-1393
Tel: 608/263-3864
E-Mail: nmwilliams@wisc.edu

Tao Zha
Emory University
1602 Fishburne Drive
Atlanta, GA 30322-2240
Tel: 404/723-3254
Fax: 404/727-4639
E-Mail: tzha@emory.edu
AB  - We use a Bayesian Markov Chain Monte Carlo algorithm to estimate a model that allows temporary gaps between a true expectational Phillips curve and the monetary authority's approximating non-expectational Phillips curve. A dynamic programming problem implies that the monetary authority's inflation target evolves as its estimated Phillips curve moves. Our estimates attribute the rise and fall of post WWII inflation in the US to an intricate interaction between the monetary authority's beliefs and economic shocks. Shocks in the 1970s altered the monetary authority's estimates and made it misperceive the tradeoff between inflation and unemployment. That caused a sharp rise in inflation in the 1970s. Our estimates say that policymakers updated their beliefs continuously. By the 1980s, their beliefs about the Phillips curve had changed enough to account for Volcker's conquest of US inflation in the early 1980s.
ER  -