NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Federal Reserve Policy: Cause and Effect

Matthew D. Shapiro

NBER Working Paper No. 4342 (Also Reprint No. r1925)
Issued in April 1993
NBER Program(s):   ME   EFG

Romer and Romer (1989,1990,1992) identify dates where the Federal Reserve appears to have shifted its policy towards reducing the rate of inflation. This paper examines the economic context that drives this decision. It finds that the Fed appears to weigh the outlook for unemployment as well as that for inflation in making its decision about disinflation. Previous work has not examined the course of inflation over the disinflations. This paper finds responses of the inflation rate to the "disinflations" only in a specification where the effects of the policy are presumed to be permanent Moreover, the Volcker disinflation is found to be the only "disinflation" to reduce inflation permanently. The disinflation after the 1973 OPEC price increases was effective, but only temporarily. Other disinflations had negligible impacts on the rate of inflation over all horizons. Variables measuring the expected present discounted values of unemployment and inflation are constructed. These variables are used in a discrete-choice model to explain the Fed's decision to disinflate. This model does a fairly good job of explaining the Fed's decisions. Both inflation and unemployment drive the Fed's decision. For some episodes, notably in the 1970's, inflation is the main variable driving the decision. In the 1969 and 1988 episodes, unemployment matters more.

download in pdf format
   (298 K)

email paper

This paper is available as PDF (298 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w4342

Published:

Users who downloaded this paper also downloaded these:
Shapiro Federal Reserve Policy: Cause and Effect
Romer and Romer Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz
Cecchetti w14134 Crisis and Responses: the Federal Reserve and the Financial Crisis of 2007-2008
Bordo w11714 Review of A History of the Federal Reserve. Volume 1 (2003) by Allan H. Meltzer
Romer and Romer w2966 Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us