Controllability of inflation: myths and facts.

The article focuses on the empirical analysis of inflation control through monetary policy in the United States during two distinct periods: the Burns/Miller chairmanship (1970–1979) characterized by high inflation and financial regulation, and the Greenspan chairmanship (1987–2006) marked by low inflation and financial deregulation. Using a cointegrated Vector AutoRegressive (CVAR) model and control theory, the study finds that raising the federal funds rate did not effectively reduce inflation in either period; instead, shocks to policy rates often had a positive long-run impact on inflation. The analysis reveals a broken transmission mechanism from short- to long-term interest rates and a disconnect between interest rates and inflation, particularly during the Greenspan era when inflation was significantly lower than interest rates, violating the Fisher parity condition. The paper attributes these findings to increased financial deregulation and global competition, which have led to persistent nonstationarities in key economic relationships and speculative behavior in asset markets, thereby limiting the central bank's ability to control inflation via traditional interest rate policies.