HAS THE RESPONSE OF INFLATION TO MACRO POLICY CHANGED? Recent Changes in Macro Policy and its Effects: Some Time-Series Evidence

Has the macroeconomic policy "regime" changed in the United States in the last few years? If so, has t h s change had an effect on macroeconomic relationships, and, in particular, on the relationshp between inflation and unemployment? These two questions have been on the minds of most macroeconomists since the October 1979 switch from interest rates to reserves as an intermediate target for the Federal Reserve and the explicit endorsement of monetarism by the Reagan Administration in early 1981. The questions are important not only for predicting the course of the economy in the future, but also for assessing the practical significance of the Lucas critique.' According to this critique a change in policy regime should cause changes in the way the economy operates. Comparing economic relations before and after a change in regime should provide a test of the critique. The approach in many recent studies has been to assume that the answer to the first question is yes-that there has been a significant change in the macroeconomic policy regime-and to look for changes in the Phllips curve as a test of the Lucas critique. Thus far, the results have been mixed. Otto Eckstein (1983), Steven Englander and Cornelis Los (1983), and George Perry (1983) conclude that there has been no significant