Outsourced to Pro-Growth Liberal: John Cochrane on the 1982 Fiscal Restraint ???:
Stephen Williamson starts musing over this:
So, suppose I am Paul Volcker, and I'm faced with a situation at point A where the inflation rate is high and the nominal interest rate is high.... I can reduce inflation in the short run by increasing the nominal interest rate, thus moving to B. But that won't work to reduce inflation in the long run, so after increasing the nominal interest rate, I have to begin reducing it.
At this point one might be best advised to stop reading.... But silly me had to read Cochrane’s take on this which included:
To be sure, I left the grand Volcker stabilization out of the picture here, where a sharp spike in interest rates preceded the sudden end of inflation. And to be sure, there is a standard story to explain negative causation with positive correlation. But there are other stories too--the US embarked on a joint fiscal-monetary stabilization in 1982, then under the shadow of an implicit inflation target gradually lowered inflation and interest rates.
Did Cochrane and I live on different planets some 30 plus years ago? My recollection was that Reagan’s fiscal policy was quite stimulative, working contrary to Voclker’s tight monetary policy. Which is why real interest rates during the 1980’s shot up dramatically, and stayed high even as inflation and nominal interest rates fell. Yes--there are “other stories too”. Stories that don’t fit the reality...
Talk about people with no control over and no understanding of what their models are telling them...