The Great Inflation And Limited Asset Market Participation: Fed Policy Was Better Than We Think
- Topics:
- Organization
- Tags:
- Asset,
- Asset Management,
- Business Operations,
- Federal Reserve Board,
- Inflation,
- Operational Planning,
- Participation,
- Policy
- Source:
- University of Oxford
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Overview: This paper argues that limited asset market participation before 1980 in the US (and the change thereof) is crucial in explaining macroeconomic performance and monetary policy conduct. Our model predicts that when participation rates change from low to high the slope of the IS curve changes from positive ('non-Keynesian') to negative (standard). We provide empirical evidence for such a change in the US around 1980. In the non-Keynesian case, a passive monetary policy rule ensures equilibrium determinacy and maximizes welfare. Hence, Fed policy was closer to optimal than conventional wisdom dictates; policy may have changed endogenously from passive to active due to the change in asset market participation.
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Format: PDF | Size: 440KB | Date: Feb 2005 | Pages: 31
