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Our most academic publication offers research and surveys on monetary policy, national and international developments, banking, and more. The content is written for an economically informed readership—from the undergraduate student to the PhD.


Vol. 95, No. 6 (Posted 2013-12-20)

The Reform of October 1979: How It Happened and Why

by David E. Lindsey, Athanasios Orphanides, and Robert H. Rasche

This study offers a historical review of the monetary policy reform of October 6, 1979, and discusses the influences behind it and its significance. We lay out the record from the start of 1979 through the spring of 1980, relying almost exclusively on contemporaneous sources, including the recently released transcripts of Federal Open Market Committee (FOMC) meetings during 1979. We then present and discuss in detail the reasons for the FOMC’s adoption of the reform and the communications challenge presented to the Committee during this period. Further, we examine whether the essential characteristics of the reform were consistent with monetarism; new, neo, or old-fashioned Keynesianism; nominal income targeting; and inflation targeting. The record suggests that the reform was adopted when the FOMC became convinced that its earlier gradualist strategy using finely tuned interest rate moves had proved inadequate for fighting inflation and reversing inflation expectations. The new plan had to break dramatically with established practice, allow for the possibility of substantial increases in short-term interest rates yet be politically acceptable, and convince financial market participants that it would be effective. The new operating procedures were also adopted for the pragmatic reason that they would likely succeed.

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