Working Paper: NBER ID: w11562
Authors: Marvin Goodfriend; Robert King
Abstract: Using a simple modern macroeconomic model, we argue that the real effects of the Volcker disinflation in the early 1980s were mainly due to imperfect credibility, evident in volatility and stubbornness of long-term interest rates. Studying recently released transcripts of the Federal Open Market Committee, we find -- to our surprise -- that Volcker and other FOMC members also regarded long-term interest rates as key indicators of inflation expectations and of their disinflationary policy's credibility. We also consider the interplay of monetary targets, operating procedures, and credibility during the Volcker disinflation.
Keywords: No keywords provided
JEL Codes: E3; E4; E5; N1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| imperfect credibility (D83) | higher output losses (E23) |
| imperfect credibility (D83) | stubborn inflationary expectations (E31) |
| stubborn inflationary expectations (E31) | rising long-term interest rates (E43) |
| FOMC's recognition of credibility (E52) | success of disinflationary efforts (E31) |
| gradual increase in likelihood of successful disinflation (E31) | decline in output (E23) |