Inflation, unemployment, and the time consistency of the US monetary policy

This paper verifies the performance of the Barro and Gordon (1983) model to explain the US inflation since the early 1950s. We divide the period from 1951:2 to 2010:2 according to each chairman of the Federal Reserve (FED). In addition, we consider aggregated periods, represented by pre-Volcker, Volcker–Greenspan, Greenspan–Bernanke, and whole sample. A genetic algorithm of stochastic search is applied to reduce the sensitivity of the maximum likelihood estimator to the initial parameter values. Surprisingly, our results show that the time consistency problem explains the US inflation during the Greenspan chairmanship at the FED.

Research highlights▶ Time consistency problem explains the US inflation during the Greenspan chairmanship at the FED. ▶ Time consistency problem explains the US inflation during the Burns and Miller chairmanship at the FED. ▶ There is an important long run co-movement between inflation and unemployment in the US economy.