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Central Banking, Monetary Theory and Practice

Essays in Honour of Charles Goodhart, Volume One

Edited by Paul Mizen

Celebrating the contribution that Charles Goodhart has made to monetary economics and policy, this unique compendium of original papers draws together a highly respected group of international academics, central bankers and financial market regulators covering a broad range of issues in modern monetary economics. Topics discussed include: central bank independence; credibility and transparency; the inflation forecast and the loss function; monetary policy experiences in the US and the UK; the implications of Goodhart’s Law; the benefits of single versus multiple currencies; and money, near monies and credit.
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Chapter 6: The phases of US monetary policy: 1987-2001

Marvin Goodfriend


6. The phases of US monetary policy: 1987–2001 Marvin Goodfriend1 1. INTRODUCTION Inflation was relatively well-behaved in the 1990s in comparison with preceding decades, yet Federal Reserve monetary policy was no less challenging. The Fed took painful actions in the late 1970s and early 1980s to reverse rising inflation and bring it down, and inflation fell from over 10 per cent to around 4 per cent by the mid-1980s. The worst economic ills stemming from high and unstable inflation were put behind us. Yet central bankers and monetary economists recognized that more disinflation was needed to achieve price stability. Completing the transition to price stability was expected to be comparatively straightforward. Monetary policy promised to become more routine. Although the 1990s saw the longest cyclical expansion in US history, the promised tranquility did not materialize. In many ways the period to be chronicled here proved to be about as difficult for monetary policy as the preceding inflationary period. My account of Fed monetary policy divides the period since 1987 into six distinct phases. This division is a natural one because in each phase the Fed was confronted with a different policy problem. Phase 1 begins with rising inflation in the aftermath of the October 1987 stock market crash and ends with the start of the Gulf War in August 1990. Phase 2 covers the 1990–91 recession, the slow recovery, and the disinflation to the end of 1993. Phase...

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