Article ID Journal Published Year Pages File Type
9732024 Review of Economic Dynamics 2005 36 Pages PDF
Abstract
We study the hypothesis that misperceptions of trend productivity growth during the onset of the productivity slowdown in the US caused much of the great inflation of the 1970s. We use the general equilibrium, sticky price framework of Woodford [Interest and Prices, Princeton Univ. Press, Princeton, NJ, 2003] augmented with learning using the techniques of Evans and Honkapohja [Learning and Expectations in Macroeconomics, Princeton Univ. Press, Princeton, NJ, 2001]. We allow for endogenous investment as well as explicit, exogenous growth in productivity and the labor input. We assume the monetary policymaker is committed to using a Taylor-type policy rule. We study how this economy reacts to an unexpected change in the trend productivity growth rate under learning. We find that a substantial portion of the observed increase in inflation during the 1970s can be attributed to this source.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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