The decline of activist stabilization policy : natural rate misperceptions, learning, and expectations

  • We develop an estimated model of the U.S. economy in which agents form expectations by continually updating their beliefs regarding the behavior of the economy and monetary policy. We explore the effects of policymakers' misperceptions of the natural rate of unemployment during the late 1960s and 1970s on the formation of expectations and macroeconomic outcomes. We find that the combination of monetary policy directed at tight stabilization of unemployment near its perceived natural rate and large real-time errors in estimates of the natural rate uprooted heretofore quiescent in inflation expectations and destabilized the economy. Had monetary policy reacted less aggressively to perceived unemployment gaps, in inflation expectations would have remained anchored and the stag inflation of the 1970s would have been avoided. Indeed, we find that less activist policies would have been more effective at stabilizing both in inflation and unemployment. We argue that policymakers, learning from the experience of the 1970s, eschewed activist policies in favor of policies that concentrated on the achievement of price stability, contributing to the subsequent improvements in macroeconomic performance of the U.S. economy.

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Metadaten
Author:Athanasios OrphanidesORCiDGND, John C. Williams
URN:urn:nbn:de:hebis:30-10758
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2004,24
Series (Serial Number):CFS working paper series (2004, 24)
Document Type:Working Paper
Language:English
Year of Completion:2004
Year of first Publication:2004
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2005/06/13
Tag:Learning; Monetary Policy; Rational Expectations; Stagnation
GND Keyword:USA; Geldpolitik; Erwartung; Wirtschaftsentwicklung; Geschichte 1965-1979
Issue:April 2004
HeBIS-PPN:222081589
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht