Monetary Policy and Inflation in the 70s


  • We would like to thank Gregor Bäurle for excellent research assistance and F. Canova, T. Lubik, A. Orphanides, A. Pagan, F. Schorfheide, M. Woodford, and two anonymous referees for valuable comments. Harris Dellas is grateful to Ecoscientia Stiftung for its generous support.


An influential paper by Clarida, Galí, and Gertler (2000) has attributed the great inflation of the 1970s to the violation of the Taylor principle in the conduct of U.S. monetary policy (weak, indeterminacy inducing response to expected inflation). We evaluate this thesis in the context of a standard New Keynesian model against a version of the model that incorporates incomplete information learning about the true state of the economy. The likelihood-based estimation of the model overwhelmingly favors the specification with indeterminacy over the alternatives with determinacy, independent of the presence and size of misperceptions.