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The Great Inflation Drift
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The Great Inflation Drift

In: The Great Inflation: The Rebirth of Modern Central Banking

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  • Marvin Goodfriend
  • Robert G. King

Abstract

A standard statistical perspective on the U.S. Great Inflation is that it involves an increase in the stochastic trend rate of inflation, defined as the long-term forecast of inflation at each point in time. That perspective receives support from two sources: the behavior of long-term interest rates which are generally supposed to contain private sector forecasts, and statistical studies of U.S. inflation dynamics. We show that a textbook macroeconomic model delivers such a stochastic inflation trend, when there are shifts in the growth rate of capacity output, under two behavioral hypotheses about the central bank: (i) that it seeks to maintain output at capacity; and (ii) that it seeks to maintain continuity of the short-term interest rate. The theory then identifies major upswings in trend inflation with unexpectedly slow growth of capacity output. We interpret the rise of inflation in the U.S. from the perspective of this simple macroeconomic framework.
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Suggested Citation

  • Marvin Goodfriend & Robert G. King, 2013. "The Great Inflation Drift," NBER Chapters, in: The Great Inflation: The Rebirth of Modern Central Banking, pages 181-209, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:9168
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    Cited by:

    1. Michael D. Bordo & Pierre L. Siklos, 2015. "Central Bank Credibility: An Historical and Quantitative Exploration," NBER Working Papers 20824, National Bureau of Economic Research, Inc.
    2. Aurélien Goutsmedt, 2017. "Stagflation and the crossroad in macroeconomics: the struggle between structural and New Classical macroeconometrics," Documents de travail du Centre d'Economie de la Sorbonne 17043, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    3. Kushal Banik Chowdhury & Nityananda Sarkar, 2017. "Is the Hybrid New Keynesian Phillips Curve Stable? Evidence from Some Emerging Economies," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 15(3), pages 427-449, September.
    4. Berger, Tino & Everaert, Gerdie & Vierke, Hauke, 2016. "Testing for time variation in an unobserved components model for the U.S. economy," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 179-208.
    5. Vicente da Gama Machado & Marcelo Savino Portugal, 2014. "Phillips curve in Brazil: an unobserved components approach," Working Papers Series 354, Central Bank of Brazil, Research Department.
    6. Claudio Borio & Piti Disyatat & Mikael Juselius, 2014. "A parsimonious approach to incorporating economic information in measures of potential output," BIS Working Papers 442, Bank for International Settlements.
    7. Garcés Díaz Daniel, 2016. "Changes in Inflation Predictability in Major Latin American Countries," Working Papers 2016-20, Banco de México.
    8. Ohanian, Lee E., 2014. "The impact of monetary policy in the midst of big shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 49(C), pages 35-48.
    9. Rochelle M. Edge & Refet S. Gurkaynak, 2010. "How Useful Are Estimated DSGE Model Forecasts for Central Bankers?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(2 (Fall)), pages 209-259.
    10. Sandeep Mazumder, 2012. "European Inflation and the New Keynesian Phillips Curve," Southern Economic Journal, John Wiley & Sons, vol. 79(2), pages 322-349, October.
    11. Efrem Castelnuovo, 2013. "What does a Monetary Policy Shock Do? An International Analysis with Multiple Filters," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(5), pages 759-784, October.
    12. Goutsmedt, Aurélien, 2019. "Macroeconomics at the Crossroads: Stagflation and the Struggle between "Keynesian" and New Classical Macroeconometric Programs," OSF Preprints y364t, Center for Open Science.
    13. Torre Cepeda Leonardo E. & Flores Segovia Miguel A., 2020. "Private Banking Credit and Economic Growth in Mexico: A State Level Panel Data Analysis 2005-2018," Working Papers 2020-17, Banco de México.
    14. Bhamra, Harjoat S. & Fisher, Adlai J. & Kuehn, Lars-Alexander, 2011. "Monetary policy and corporate default," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 480-494.
    15. Rochelle M. Edge & Refet S. Gürkaynak, 2011. "How useful are estimated DSGE model forecasts?," Finance and Economics Discussion Series 2011-11, Board of Governors of the Federal Reserve System (U.S.).
    16. Garcés Díaz Daniel, 2020. "On the Drivers of Inflation in Different Monetary Regimes," Working Papers 2020-16, Banco de México.

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    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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