The Rise, Fall and Stabilization of U.S. Inflation: Shifting Regimes and Evolving Reputation
The rise, fall, and stabilization of US inflation between 1969 and 2005 is consistent with a model of shifting policy regimes that features a forward-looking New Keynesian Phillips curve, policymakers that can or cannot commit, and private sector learning about policymaker type. Using model-implied inflation forecasting rules to extract state variables from the inflation forecasts in the Survey of Professional Forecasters, we provide evidence that policy regimes without commitment prevailed before 1980 and regimes with commitment prevailed afterward. With theory and quantification, we find that evolution of reputational capital is central to understanding the behavior of inflation.
We would like to thank the audience at various conferences and seminars for helpful comments and discussions. All errors are ours. We acknowledge financial support from the RGC of HKSAR (GRF HKUST-16504317). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.