Working Paper: NBER ID: w1491
Authors: John B. Taylor
Abstract: This paper compares macroeconomic performance in the United States from 1891 through 1914 with the period after the Second World War by estimating reduced form autoregressions for prices, wages and output, by looking at their moving average representations, and by giving them simple structural interpretations. The results show that the impulses to the economic system were smaller in the later period, but the propagation mechanisms are much slower and more drawn out. The smaller shocks are therefore translated into larger and more prolonged fluctuations in output and inflation than would occur if the earlier dynamics were applicable in the later period. A tentative explanation for the changes in the dynamics is a slower speed of wage and price adjustment combined with a different accommodative stance for the monetary system.
Keywords: macroeconomic stability; wages; prices; business cycles
JEL Codes: E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| smaller shocks (E32) | less severe economic fluctuations (E32) |
| slower wage and price adjustments + different accommodative stance of monetary policy (E49) | change in dynamics (C69) |
| inflation shocks (E31) | negative lagged effect on output (E23) |
| output shocks (E39) | positive lagged effect on inflation (E31) |