Author : Giorgio E. Primiceri
Publisher :
ISBN 13 :
Total Pages : 60 pages
Book Rating : 4.:/5 (253 download)
Book Synopsis Why Inflation Rose and Fell by : Giorgio E. Primiceri
Download or read book Why Inflation Rose and Fell written by Giorgio E. Primiceri and published by . This book was released on 2005 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.