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Working Paper No. 96-10
University of California, Department of Economics, Davis, CA
Why was the Fed so inflationary in 1965-79? No single explanation suffices. Forecast errors and poor operating procedures played at most a minor role. Unwillingness to accept greater interest-rate variation and cognitive errors played a greater role. Political pressures also played a role, but, given its desired policy the Fed was not greatly constrained by them. Wage and price controls played an uncertain role. The most important factor was the prevailing intellectual atmosphere with its de-emphasis on the costs of inflation, its faith in the viability of an inflation/unemployment trade-off and concern with cost-push elements.
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