Skip to main content
×
×
Home

US inflation and inflation uncertainty over 200 years

  • Don Bredin (a1) and Stilianos Fountas (a2)
Abstract

This article uses historical US inflation data covering over two centuries to examine the impact of the establishment of the US Federal Reserve on average US inflation and inflation uncertainty. We find that the founding of the Fed is associated with higher average US inflation and lower inflation uncertainty. Critically, these results are not driven by the post-1980 period, where the Fed policy is characterised by the dual mandate. Other important results are that the gold standard period is associated with both lower inflation and inflation uncertainty, and that banking and stock market crises are a positive determinant of inflation uncertainty and perhaps inflation. World Wars I and II and the US Civil War are associated with both higher inflation and higher inflation uncertainty. In addition, we find that the central bank has responded to increasing inflation uncertainty in a stabilising manner in support of the Holland hypothesis.

Copyright
Corresponding author
D. Bredin (corresponding author), Graduate School of Business, University College Dublin, Carysfort Avenue, Blackrock, Dublin, Ireland; email: don.bredin@ucd.ie.
Footnotes
Hide All

We are grateful to the editor and anonymous referees, Cormac O'Grada, Kevin O'Rourke and John Turner for their very helpful comments on earlier drafts. The authors would also like to thank participants of the Rimini Conference in Economics and Finance (2014), the ASSET annual conference (Aix-en-Provence, 2014) and a departmental seminar at the University of Stirling for helpful comments and suggestions. The usual disclaimer applies. Bredin acknowledges the support of Science Foundation Ireland under grant number 16/SPP/3347.

Footnotes
References
Hide All
Baker, S. R., Bloom, N. and Davis, S. J. (2016). Measuring economic policy uncertainty. Quarterly Journal of Economics, 131, pp. 15931636.
Ball, L. (1992). Why does high inflation raise inflation uncertainty? Journal of Monetary Economics, 29, pp. 371–88.
Bernanke, B. (2013). A century of US central banking: goals, frameworks, accountability. Journal of Economic Perspectives, 27, pp. 316.
Bloom, N. (2009). The impact of uncertainty shocks. Econometrica, 77 (3), pp. 623–85.
Bloom, N., Floetto, M., Jaimovich, N., Saporta-Eksen, I. and Terry, S. J. (2016). Really uncertain business cycles. Working Paper Stanford University.
Bollerslev, T. and Wooldridge, J. (1992). Quasi-maximum likelihood estimation and inference in dynamic models with time-varying covariances. Econometric Review, 11, pp. 143–72.
Bredin, D. and Fountas, S. (2009). Macroeconomic uncertainty and performance in the EU. Journal of International Money and Finance, 28, pp. 972–86.
Caporale, T. and Mckiernan, B. (1998). Interest rate uncertainty and the founding of the Federal Reserve. Journal of Economic History, 58, pp. 1110–17.
Cogley, T. and Sargent, T. J. (2015). Measuring price-level uncertainty and instability in the United States, 1850–2012. Review of Economics and Statistics, 97, pp. 827–38.
Cukierman, A. and Meltzer, A. (1986). A theory of ambiguity, credibility, and inflation under discretion and asymmetric information. Econometrica, 54, pp. 10991128.
Daal, E., Naka, A. and Sanchez, B. (2005). Re-examining inflation and inflation uncertainty in developed and emerging countries. Economics Letters, 89, pp. 180–6.
Dick, C. D., Schmeling, M. and Schrimpf, A. (2013). Macro expectations, aggregate uncertainty, and expected term premia. European Economic Review, 58, pp. 5880.
Engle, R. (1982). Autoregressive conditional heteroskedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50, pp. 9871007.
Engle, R. and Ng, V. (1993). Measuring and testing the impact of news on volatility. Journal of Finance, 48, pp. 1749–78.
Evans, M. (1991). Discovering the link between inflation rates and inflation uncertainty. Journal of Money, Credit and Banking, 23, pp. 169–84.
Evans, M. and Wachtel, P. (1993). Inflation regimes and the sources of inflation uncertainty. Journal of Money, Credit and Banking, 25, pp. 475511.
Fendoglu, S. (2014). Optimal monetary policy rules, financial amplification, and uncertain business cycles. Journal of Economics Dynamics and Control, 46, pp. 271305.
Fountas, S. (2001). The relationship between inflation and inflation uncertainty in the UK: 1885–1998. Economics Letters, 74, pp. 7783.
Fountas, S., Ioannidis, A. and Karanasos, M. (2004). Inflation, inflation uncertainty, and a common European monetary policy. The Manchester School, 72, pp. 221–42.
Friedman, M. (1977). Nobel lecture: inflation and unemployment. Journal of Political Economy, 85, pp. 451–72.
Friedman, M. (1988). The Fed has no clothes. The Wall Street Journal, 15 April.
Friedman, M. and Schwartz, A. (1963). A Monetary History of the United States, 1867–1960. Princeton, NJ: Princeton University Press.
Gorton, G. and Mullineaux, D. (1987). The joint production of confidence: endogenous regulation and nineteenth century commercial-bank clearinghouses. Journal of Money, Credit and Banking, 19, pp. 457–68.
Grier, K., Henry, O., Olekalns, N. and Shields, K. (2004). The asymmetric effects of uncertainty on inflation and output growth. Journal of Applied Econometrics, 19, pp. 551–65.
Grier, K. and Perry, M. (1998). On inflation and inflation uncertainty in the G7 countries. Journal of International Money and Finance, 17, pp. 671–89.
Hamilton, J. (2008). Macroeconomics and ARCH. NBER Working Paper no. 14151.
Hamilton, J., Harris, E., Hatzius, J. and West, K. (2015). The equilibrium real funds rate: past, present and future. NBER Working Paper no. 21476.
Hamilton, J. and Susmel, R. (1994). Autoregressive conditional heteroskedasticity and changes in regime. Journal of Econometrics, 64, pp. 307–33.
Henry, O., Olekalns, N. and Suardi, S. (2007). Testing for rate dependence and asymmetry in inflation uncertainty: evidence from the G7 economies. Economics Letters, 94, pp. 383–8.
Hetzel, R. (2008). The Monetary Policy of the Federal Reserve: A History. Cambridge: Cambridge University Press.
Hogan, T. (2015). Has the Fed improved US economic performance? Journal of Macroeconomics, 43, pp. 257–66.
Holland, S. (1995). Inflation and uncertainty: tests for temporal ordering. Journal of Money, Credit, and Banking, 27, pp. 827–37.
Hwang, Y. (2001). Relationship between inflation and inflation uncertainty. Economics Letters, 73, pp. 179–86.
Knoop, T. A. (2004). Recessions and Depressions: Understanding Business Cycles. Westport, CT: Praeger.
Kontonicas, A. (2004). Inflation and inflation uncertainty in the UK: evidence from GARCH modelling. Economic Modeling, 21, pp. 524–43.
Mccallum, B. (1996). International Monetary Economics. Oxford and New York: Oxford University Press.
Meltzer, A. (2002). A History of the Federal Reserve, vol. 1: 1913–1951. Chicago: University of Chicago Press.
Meltzer, A. (2010a). A History of the Federal Reserve, vol. 2, book 1: 1951–1969. Chicago, IL: University of Chicago Press.
Meltzer, A. (2010b). A History of the Federal Reserve, vol. 2, book 2: 1970–1986. Chicago: University of Chicago Press.
Meltzer, A. (2012). Federal Reserve policy in the Great Recession. Cato Journal, 32, pp. 255–63.
Miron, J. and Romer, C. (1990). A new monthly index of industrial production, 1884–1940. Journal of Economic History, 50, pp. 321–37.
Nelson, D. (1991). Conditional heteroskedasticity in asset returns: a new approach. Econometrica, 59, pp. 347–70.
Ng, S. and Perron, P. (2001). Lag length selection and the construction of unit root tests with good size and power. Econometrica, 69, pp. 1519–54.
Reinhart, C. and Rogoff, K. (2010). This Time Is Different: Eight Centuries of Financial Follies. Princeton, NJ: Princeton University Press.
Reinhart, C. and Rogoff, K. (2011). From financial crash to debt crisis. American Economic Review, 101, pp. 16761706.
Romer, C. (1986). Is the stabilization of the postwar economy a figment of the data? American Economic Review, 76, 314–34.
Romer, C. (1989). The prewar business cycle reconsidered: new estimates of gross national product, 1896–1908. Journal of Political Economy, 97, pp. 137.
Romer, C. and Romer, D. (2013). The most dangerous idea in Federal Reserve history: monetary policy doesn't matter. American Economic Review, 103, pp. 5560.
Selgin, G. (2016). New York's bank: the National Monetary Commission and the founding of the Fed. Cato Institute Policy Analysis, 21 June, no. 793.
Selgin, G., Lastrapes, W. and White, L. (2012). Has the Fed been a failure? Journal of Macroeconomics, 34, pp. 569–96.
Sprague, O. (1910). History of Crises Under the National Banking System. Report by the National Monetary Commission to the US Senate. 61st Congress, 2nd Session, S. Doc. 538. Washington, DC: Government Printing Office.
Timberlake, R. (1984). The central banking role of clearinghouse associations. Journal of Money, Credit, and Banking, 16, pp. 115.
Watson, M. (1992). Business cycle durations and postwar stabilization of the US economy. NBER Working Paper no. 4005.
Wells, D. (2004). The Federal Reserve System: A History. Jefferson, NC: McFarland and Co.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Financial History Review
  • ISSN: 0968-5650
  • EISSN: 1474-0052
  • URL: /core/journals/financial-history-review
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords

JEL classification

Metrics

Full text views

Total number of HTML views: 3
Total number of PDF views: 12 *
Loading metrics...

Abstract views

Total abstract views: 81 *
Loading metrics...

* Views captured on Cambridge Core between 2nd July 2018 - 14th August 2018. This data will be updated every 24 hours.