Yesterday’s Briefing (to which you should subscribe if you haven’t already) mentioned a new Brookings paper by the superstar economist couple Christina and David Romer. (Christina Romer was chair of Obama’s CEA in 2009-2010.) We thought the paper was interesting enough to warrant a full writeup. It’s also very timely, since in the aftermath of the global market crash, pressure is increasing on the Fed to cut rates, even as inflation is not yet fully under control.

The goal of the study is to find out what differentiates periods when the Fed successfully fought inflation, and those when it failed to do so.

Using detailed records of FOMC meetings, the study identifies nine episodes between 1946 and 2016 when the Fed explicitly set out to reduce inflation and was willing to accept a cost to the economy as a price of that disinflation.

The study analyses the Fed’s commitment to disinflation in each episode, based on several criteria: how much output loss policymakers were willing to accept, whether they viewed inflation as solely their responsibility to solve, if they had a clear inflation goal, and whether it was a “second try” following a previous attempt.

Based on these factors, the study rates the Fed’s commitment in each episode on a 1-5 scale. It finds that it is primarily initial commitment which correlates most strongly with the ultimate success of the disinflation attempt.

The paper employs a clever mix of narrative and quantitative analysis. The authors first conduct a detailed examination of FOMC records to assess commitment and determine when disinflationary policy ended in each episode. They then use this information in a regression analysis, showing that a disinflationary shock indicator scaled by their commitment measure produces a tighter relationship with inflation outcomes than an unscaled indicator.

Doing a regression analysis on nine data points is completely superfluous, but this is the modern economics profession, where you have to add math to seem serious, even where it doesn’t make sense. To be fair, the authors are careful to present the regression analysis as complementary to their narrative evidence rather than as the main basis for their conclusions.

Regardless, what is most interesting is that the study finds no evidence that stronger Fed commitment directly lowered inflation expectations. Using both historical surveys of professional forecasters and high-frequency financial market data, it shows little consistent impact of news about Fed commitment on expected inflation. Instead, the key mechanism appears to be that a stronger initial commitment made the Fed more likely to persist with tight policy until inflation was reduced.

Episodes with weak commitment tended to end prematurely, often because policymakers felt output costs were too high or that monetary policy had “done its part.” The study explains how these justifications for easing mapped closely to the views that indicated low commitment at the outset.

We liked the study’s methodology of using detailed narrative evidence and just enough quantitative analysis. The commitment measure provides a novel way to differentiate disinflationary episodes beyond just the size of rate hikes. More generally, and almost philosophically, we appreciate the finding that the will of the policymakers is often a key determinant of whether a policy is successful or not, an aspect that is too often ignored in policy analysis.

Finally, it’s a timely paper since people are wondering whether the Fed will cut rates in response to the current market crash. The authors write of the Fed’s hawkish turn in 2022: “We find that the language used both in the policy discussion and in the public testimonies and speeches mimics that of the most committed disinflations of the past. Based on this, we would expect policymakers to stick with the disinflation program until inflation is reduced. Thus, we anticipate that the policy will ultimately be successful.” We shall see, won’t we?

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