James K. Galbraith, Olivier Giovannoni, and Ann J. Russo use the power of statistics to show that, from 1984 to 2003, contrary to official claims, the Federal Reserve does not target inflation or react to “inflation signals.” Rather, the Fed reacts to the very “real” signal sent by unemployment; in a way that suggests that a baseless fear of full employment is a principal force behind monetary policy. Working on data going back to 1969, they suggest that after 1983 the Federal Reserve largely ceased reacting to inflation or high unemployment, but continued to react when unemployment fell “too low.” The authors also find that monetary policy has significant causal impact on pay inequality.
Galbraith,James K., Olivier Giovannoni, and Ann J. Russo. 2007. The Fed’s Real Reaction Function: Monetary Policy, Inflation, Unemployment, Inequality – and Presidential Politics. UTIP Working Paper No. 42. Austin: University of Texas Inequality Project.
Full text: utip.gov.utexas.edu/papers/utip_42.pdf