Lessons from History for Successful Disinflation

Why do some attempts at disinflation lead to substantial reductions in inflation while others do not? We investigate this question in the context of the Federal Reserve’s attempts at disinflation since World War II. Our central finding is that a fundamental determinant of success in reducing inflation was the strength of the Federal Reserve’s commitment to disinflation at the start of its attempts. In episodes where its commitment was high, there were significant declines in inflation that were often long-lasting, while in ones where its commitment was low, falls in inflation were at most small and short-lived. We find that although the extent of the Federal Reserve’s commitment was often clear to the public, there is no evidence that stronger commitment to disinflation directly affected expected inflation. Rather, the main channel through which weak commitment led to unsuccessful disinflation was premature abandonment of the disinflationary policy. We conclude by discussing the implications for the Federal Reserve’s current effort at disinflation.