Shocks and Government Beliefs: The Rise and Fall of American Inflation / Thomas Sargent, Noah Williams, Tao Zha.

Format:

Book

Author/Creator:

Sargent, Thomas.

Contributor:

National Bureau of Economic Research.

Williams, Noah.

Zha, Tao.

Series:

Working Paper Series (National Bureau of Economic Research) no. w10764.

NBER working paper series no. w10764

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Shocks and Government Beliefs

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2004.

Summary:

We use a Bayesian Markov Chain Monte Carlo algorithm to estimate a model that allows temporary gaps between a true expectational Phillips curve and the monetary authority's approximating non-expectational Phillips curve. A dynamic programming problem implies that the monetary authority's inflation target evolves as its estimated Phillips curve moves. Our estimates attribute the rise and fall of post WWII inflation in the US to an intricate interaction between the monetary authority's beliefs and economic shocks. Shocks in the 1970s altered the monetary authority's estimates and made it misperceive the tradeoff between inflation and unemployment. That caused a sharp rise in inflation in the 1970s. Our estimates say that policymakers updated their beliefs continuously. By the 1980s, their beliefs about the Phillips curve had changed enough to account for Volcker's conquest of US inflation in the early 1980s.

Notes:

Print version record

September 2004.