How Would Have Monetary Policy During the Great Inflation Differed, if it Had Been Conducted in the Styles of Volcker and Greenspan and with Perfect Foresight?

Abstract

Using nonlinear monetary policy rules estimated under Martin, Burns/Miller, Volcker and Greenspan chairmanships this paper evaluates quantitatively how monetary policy under Burns/Miller would have differed, if it had been conducted by means of the policy rules found for each of the other three chairs. The main results are that if policy had been conducted by means of a Volcker-type rule, it would have been uniformly more restrictive; and if it had been conducted by means of a Greenspan-type rule, it would have been less restrictive. These results are robust to the introduction of real-time data. The paper also evaluates the impact of inflation uncertainty on monetary policy. Real-time Greenbook inflation forecasts reveal that, during the great inflation period, the Fed's staff believed that monetary policy was more restrictive than it turned out to be with the benefit of hindsight. The opposite happened during inflation stabilization under Volcker.