TY  - JOUR
AU  - Bordo,Michael D.
AU  - Erceg,Christopher
AU  - Levin,Andrew
AU  - Michaels,Ryan
TI  - Three Great American Disinflations
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12982
PY  - 2007
Y2  - March 2007
UR  - http://www.nber.org/papers/w12982
L1  - http://www.nber.org/papers/w12982.pdf
N1  - Author contact info:
Michael D. Bordo
Department of Economics
Rutgers University
New Jersey Hall
75 Hamilton Street
New Brunswick, NJ 08901
Tel: 732/822-7152
Fax: 732/932-7416
E-Mail: bordo@econ.rutgers.edu

Christopher Erceg
The Federal Reserve Board
Mail Stop 20
20th and C Street, N.W.
Washington, D.C.   20551
E-Mail: christopher.erceg@frb.gov

Andrew T.. Levin
Federal Reserve Board
Mail Stop 133
20th and C Street, NW
Washington, DC   20551
Tel: 202-452-3541
Fax: 202-452-2301
E-Mail: andrew.levin@frb.gov

Ryan Michaels
Department of Economics
University of Michigan
Ann Arbor, MI 48109-1220
E-Mail: rmikes@umich.edu
AB  - This paper analyzes the role of transparency and credibility in accounting for the widely divergent macroeconomic effects of three episodes of deliberate monetary contraction: the post-Civil War deflation, the post-WWI deflation, and the Volcker disinflation. Using a dynamic general equilibrium model in which private agents use optimal filtering to infer the central bank's nominal anchor, we demonstrate that the salient features of these three historical episodes can be explained by differences in the design and transparency of monetary policy, even without any time variation in economic structure or model parameters. For a policy regime with relatively high credibility, our analysis highlights the benefits of a gradualist approach (as in the 1870s) rather than a sudden change in policy (as in 1920-21). In contrast, for a policy institution with relatively low credibility (such as the Federal Reserve in late 1980), an aggressive policy stance can play an important signalling role by making the policy shift more evident to private agents.
ER  -