Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970's?

The paper re-examines whether the Federal Reserve’s monetary policy was a source of instability during the Great In‡ation by estimating a sticky-price model with positive trend in‡ation, commodity price shocks and sluggish real wages. Our estimation provides empirical evidence for substantial wage-rigidity and …nds that the Federal Reserve responded aggressively to in‡ation but neg-ligibly to the output gap. In the presence of non-trivial real imperfections and well-identi…ed commodity price-shocks, U.S. data prefers a determinate ver-sion of the New Keynesian model: monetary policy-induced indeterminacy and sunspots were not causes of macroeconomic instability during the pre-Volcker era.