Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy / Giorgio Primiceri.

Format:

Book

Author/Creator:

Primiceri, Giorgio.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11147.

NBER working paper series no. w11147

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Why Inflation Rose and Fell

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

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 policymakers 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 policymakers 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 policymakers' beliefs, stabilization policy and the postwar behavior of inflation and unemployment in the United States.

Notes:

Print version record

February 2005.