Did the Great Inflation Occur Despite Policymaker Commitment to a Taylor Rule?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The authors study the hypothesis that misperceptions of trend productivity growth during the onset of the productivity slowdown in the United States caused much of the great inflation of the 1970s. They use the general equilibrium, sticky price framework of Woodford (2002), augmented with learning using the techniques of Evans and Honkapohja (2001). The authors allow for endogenous investment as well as explicit, exogenous growth in productivity and the labor input. They assume the monetary policymaker is committed to using a Taylor-type policy rule. The authors study how this economy reacts to an unexpected change in the trend productivity growth rate under learning. They find that a substantial portion of the observed increase in inflation during the 1970s can be attributed to this source. Terms of use: Documents in JEL classification: E4, E5

Can perpetual learning explain the forward-premium puzzle?

“…6 In fact, we require only a small and quite natural deviation from rational expectations, based on the econometric learning approach increasingly utilized in macroeconomics. Recent applications include the design of monetary policy (Bullard and Mitra (2002), Evans and Honkapohja (2003), and Orphanides and Williams (2005a)), recurrent hyperinflations in Latin America (Marcet and Nicolini (2003)), US inflation and disinflation (Sargent (1999), Orphanides and Williams (2005b), Bullard and Eusepi (2005)), asset prices (Timmermann (1993), Brock and Hommes (1998), Bullard and Duffy (2001), 3 Fama (1984) demonstrates that, for this to happen, the variance of the risk premium must be greater than the variance of expected depreciation, and their covariance must be negative.These requirements do not appear to be supported empirically.…”

A note on the representative adaptive learning algorithm

“…The LS dominance also has been challenged in previous applied studies (see Bullard and Eusepi, 2005;Carceles-Poveda and Giannitsarou, 2007). Hence, it remains open the question of which algorithm should be taken as representative from an empirical standpoint.…”

Robustifying learnability

“…Learnability applications in the literature to date have been confined to very simple, small-scale models where these problems rarely come into play. 7 In the kind of medium-to large-scale models that policy institutions use, these issues cannot be safely ignored. 8 Without taking away anything from the important contributions of Bullard and 7 A notable exception is Garratt and Hall [22], but even then the learning problem was constrained to exchange rate determination.…”