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Monetary Policy and Inflation in the 70s
Author(s) -
COLLARD FABRICE,
DELLAS HARRIS
Publication year - 2008
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2008.00181.x
Subject(s) - determinacy , indeterminacy (philosophy) , new keynesian economics , economics , monetary policy , keynesian economics , inflation (cosmology) , context (archaeology) , taylor rule , estimation , econometrics , macroeconomics , monetary economics , central bank , mathematics , philosophy , mathematical analysis , paleontology , physics , epistemology , theoretical physics , biology , management
An influential paper by Clarida, Galí, and Gertler (2000) has attributed the great inflation of the 1970s to the violation of the Taylor principle in the conduct of U.S. monetary policy (weak, indeterminacy inducing response to expected inflation). We evaluate this thesis in the context of a standard New Keynesian model against a version of the model that incorporates incomplete information learning about the true state of the economy. The likelihood‐based estimation of the model overwhelmingly favors the specification with indeterminacy over the alternatives with determinacy, independent of the presence and size of misperceptions.