Would the bundesbank have prevented the great inflation in the United States?

Luca Benati (1) , Banque de France (1)

1 Monetary Policy ResearchDivision

Policy counterfactuals based on estimated structural VARs routinely suggest that bringing Alan Greenspan back in the 1970s' United States would not have prevented the Great Inflation. We show that a standard policy counterfactual suggests that the --which is near-universally credited for sparing West Germany the Great Inflation--would also have been able to prevent the Great Inflation in the United States. The implausibility of this result sounds a cautionary note on taking the outcome of SVAR-based policy counterfactuals at face value, and raises questions on the reliability of such exercises.

Keywords: Bayesian VARs; Time-varying parameters; Stochastic volatility; Identified VARs; Great Inflation; Policy counterfactuals

Domains: Quantitative Finance [q-fin]

Luca Benati, Banque de France. Would the bundesbank have prevented the great inflation in the United States?. Journal of Economic Dynamics and Control, 2011, 35 (7), pp.1106. ⟨10.1016/j.jedc.2011.02.002⟩. ⟨hal-00822061⟩