TY - JOUR
T1 - Why inflation rose and fell
T2 - Policy-makers beliefs and U. S. postwar stabilization policy
AU - Primiceri, Giorgio E.
PY - 2006
Y1 - 2006
N2 - This paper provides an explanation for the run-up of U. S. inflation in the 1960s and 1970s and the sharp disinflation in the early 1980s, which standard macroeconomic models have difficulties in addressing. I present a model in which rational policy-makers learn about the behavior of the economy in real time and set stabilization policy optimally, conditional on their current beliefs. The steady state associated with the self-confirming equilibrium of the model is characterized by low inflation. However, prolonged episodes of high inflation ending with rapid disinflations can occur when policy-makers underestimate both the natural rate of unemployment and the persistence of inflation in the Phillips curve. I estimate the model using likelihood methods. The estimation results show that the model accounts remarkably well for the evolution of policy-makers' beliefs, stabilization policy, and the postwar behavior of inflation and unemployment in the United States.
AB - This paper provides an explanation for the run-up of U. S. inflation in the 1960s and 1970s and the sharp disinflation in the early 1980s, which standard macroeconomic models have difficulties in addressing. I present a model in which rational policy-makers learn about the behavior of the economy in real time and set stabilization policy optimally, conditional on their current beliefs. The steady state associated with the self-confirming equilibrium of the model is characterized by low inflation. However, prolonged episodes of high inflation ending with rapid disinflations can occur when policy-makers underestimate both the natural rate of unemployment and the persistence of inflation in the Phillips curve. I estimate the model using likelihood methods. The estimation results show that the model accounts remarkably well for the evolution of policy-makers' beliefs, stabilization policy, and the postwar behavior of inflation and unemployment in the United States.
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U2 - 10.1162/qjec.121.3.867
DO - 10.1162/qjec.121.3.867
M3 - Review article
AN - SCOPUS:33746633914
VL - 121
SP - 867
EP - 901
JO - Quarterly Journal of Economics
JF - Quarterly Journal of Economics
SN - 0033-5533
IS - 3
ER -