Why do some attempts at disinflation lead to substantial reductions in inflation while others do not? We investigate this question in the context of the Federal Reserve’s attempts at disinflation since World War II. Our central finding is that a fundamental determinant of success in reducing inflation was the strength of the Federal Reserve’s commitment to disinflation at the start of its attempts. In episodes where its commitment was high, there were significant declines in inflation that were often long-lasting, while in ones where its commitment was low, falls in inflation were at most small and short-lived. We find that although the extent of the Federal Reserve’s commitment was often clear to the public, there is no evidence that stronger commitment to disinflation directly affected expected inflation. Rather, the main channel through which weak commitment led to unsuccessful disinflation was premature abandonment of the disinflationary policy. We conclude by discussing the implications for the Federal Reserve’s current effort at disinflation.
Authors
- Acknowledgements & Disclosure
- We are grateful to Laurence Ball, Yuriy Gorodnichenko, Donald Kohn, and conference participants at the National Bureau of Economic Research for helpful comments and suggestions. This paper was prepared for the NBER conference on Inflation in the COVID Era and Beyond supported by the Smith Richardson Foundation. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w32666
- Pages
- 58
- Published in
- United States of America
Table of Contents
- NBER WORKING PAPER SERIES 1
- LESSONS FROM HISTORY FOR SUCCESSFUL DISINFLATION 1
- Christina D. Romer David H. Romer 1
- Working Paper 32666 httpwww.nber.orgpapersw32666 1
- NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge MA 02138 July 2024 1
- Lessons from History for Successful Disinflation Christina D. Romer and David H. Romer NBER Working Paper No. 32666 July 2024 JEL No. E31E52E58E65N12 2
- Christina D. Romer Department of Economics University of California Berkeley Berkeley CA 94720-3880 and NBER cromerberkeley.edu 2
- David H. Romer Department of Economics University of California Berkeley Berkeley CA 94720-3880 and NBER dromerberkeley.edu 2
- A data appendix is available at httpwww.nber.orgdata-appendixw32666 2
- New 5
- York Times 5
- I. W F D A D 7
- A. Problems with Focusing on Ex Post Disinflations 7
- Overemphasis on Episodes Involving Price Controls 7
- Underemphasis on Smaller More Persistent Disinflations 9
- Poor Guide to Policy 9
- B. Deliberate Attempted Disinflations 9
- Why Focus on Monetary Disinflations 9
- Identification of Deliberate Attempted Disinflations 10
- Transcripts 10
- Minutes 10
- II. H C W M P D E 11
- A. How We Measure Commitment 11
- Sources 11
- Transcripts Minutes 11
- What We Look for in the Narrative Record 12
- B. Examples of the Narrative Evidence on Commitment 13
- High Commitment Episodes 13
- Transcript 13
- Transcript 14
- Minutes Transcripts 14
- Low Commitment Episodes. 15
- Transcript 15
- Transcript 16
- Medium Commitment Episodes. 16
- Minutes 16
- Minutes 17
- C. Discussion and a Scaled Indicator Variable for Disinflationary Shocks 18
- III. T B I D E 19
- A. Basic Facts 19
- High Commitment Episodes 19
- Low Commitment Episodes 20
- Medium Commitment Episodes 21
- B. Regression Analysis 22
- IV. T C E I 24
- A. News Reports of Commitment in Different Episodes 24
- New York Times 24
- New York Times 25
- A Publicly Perceived High Commitment Episode 25
- New York Times 25
- Times 25
- Times 26
- A Publicly Perceived Low Commitment Episode 26
- B. Some Evidence on the Expectational Mechanism 27
- Evidence from Professional Forecasts 27
- High-Frequency Evidence from the Recent Episode 28
- New York Times 29
- Wall Street Journal 29
- Discussion 30
- Wall Street Journal 31
- New York Times 31
- V. T C P A 32
- A. The Ends of Disinflationary Episodes 32
- B. Commitment and the Ends of Disinflationary Episodes 33
- Minutes 34
- Minutes 34
- Transcript 35
- Minutes 35
- Minutes 36
- Transcript 36
- C. Motivation for Premature Stopping and the Link to Commitment 37
- Monetary Policy Had Done Its Part 37
- Minutes 37
- Acceptable Output Costs Had Been Surpassed 38
- Minutes 38
- Minutes 39
- Transcript 39
- Transcript 40
- Fiscal Policy Would Fill the Gap 40
- Minutes 40
- Minutes 41
- Transcript 41
- VI. C C I T 42
- Transcripts 43
- Policies to Combat Depression 46
- Journal of Political Economy 46
- University of Pennsylvania Law Review 46
- Journal of the European Economic Association 46
- Quarterly Journal of Economics 46
- Advances in Macroeconomics 46
- New York Times 46
- Quarterly Journal of Economics 46
- Drastic Measures A History of Wage and Price Controls in the United States 46
- American Economic Review 46
- Rethinking Stabilization Policy 46
- American Economic Review 46
- Minutes of Federal Open Market Committee. 46
- Memoranda of Discussion of the Federal Open Market Committee 46
- Transcripts of the Federal Open Market Committee 47
- Wall Street Journal 47
- Federal Reserve Bank of Minneapolis Quarterly Review 47
- Notes 48
- Core observations 49
- Marginal observations 49
- Notes 49
- Notes 50
- Notes 51
- Notes 52
- Notes 54
- Notes 56
- Notes 58
