Academic journal article Federal Reserve Bulletin

Summary of Papers Presented at the Second Conference of the International Research Forum on Monetary Policy

Academic journal article Federal Reserve Bulletin

Summary of Papers Presented at the Second Conference of the International Research Forum on Monetary Policy

Article excerpt

Gregg Forte, of the Board's Division of Research and Statistics, prepared this article. The International Research Forum on Monetary Policy held its second conference on November 14 and 15, 2003. The organization is sponsored by the European Central Bank (ECB); the Board of Governors of the Federal Reserve System (FRB); the Center for German and European Studies (CGES), at Georgetown University, in Washington, D.C.; and the Center for Financial Studies (CFS), at the Goethe University, in Frankfurt. It was formed to encourage research on monetary policy issues that are relevant from a global perspective, and it organizes conferences that are held alternately in the euro area and the United States.

The 2003 conference, held in Washington, D.C., featured ten papers. (1) Among the topics examined were the Great Inflation of the 1970s in the United States and the influence of learning, or adjustment of expectations, on policy outcomes; the tradeoffs between rules-based and discretionary monetary policy; the 1999 formation of the European Economic and Monetary Union and whether it altered the degree of economic integration between the United States and the euro area; the potential benefits of greater competition in the euro area; and optimal monetary policy in an international setting. This summary discusses the papers in the order presented at the conference. (2)


In the conference's first session, "Information and Learning," two papers considered the conduct of monetary policy during the high inflation and high unemployment (stagflation) of the 1970s. In both papers, the authors note the wide agreement today that underlying productivity growth had fallen in the early 1970s and that monetary policy was too accommodative given the resultant narrowing of the output and unemployment gaps. Fabrice Collard and Harris Dellas create a model that can explain the conduct of monetary policy in the 1970s if the central bank is fairly insensitive both to expectations of rising inflation and to any perception of a wide output gap and is also highly uncertain about potential output.

Athanasios Orphanides and John C. Williams trace the high-inflation episode to monetary policy mistakes that had started earlier, in the mid-1960s. They argue that, from the mid-1960s through the late 1970s, the Federal Reserve paid excessive attention to stabilizing output and employment around levels that later proved to have been too high. This policy mistake loosened inflation expectations and gave rise to the stagflation of the 1970s. The authors believe that the recognition of this error at the end of the decade led policymakers to place greater emphasis on the stabilization of prices and of inflation expectations.

Collard and Dellas

In their paper, "The Great Inflation of the 1970s," Collard and Dellas evaluate three alternative explanations of the loose policy of the 1970s:

1. Policy was biased toward creating inflation surprises as a means of lowering unemployment (or "policy opportunism," for short)

2. Policy reacted strongly to increases in expected inflation but suffered from erroneous information that hid the actual drop in underlying productivity growth and hence in potential output; thus, policy was only inadvertently loose ("imperfect information")

3. Policy reacted weakly to increases in expected inflation ("weak reaction to inflation")

The authors employ a New Neoclassical Synthesis model, specified to produce a unique equilibrium, in which policymakers follow a standard Henderson-McKibbin-Taylor rule to set the policy rate. Finding the conditions under which such a model will generate the 1970s volatility in inflation and in other macroeconomic variables such as output and investment, the authors say, may indicate which of the policy explanations is most relevant.

In the monetary policy rule, the policy variable set by the authority in the present period is a function of three other variables: the policy variable in the preceding period, the inflation gap (the gap between inflation expected in the next period and the steady-state rate), and the output gap (the gap between current output and potential output). …

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