Josh Hendrickson of the Everyday Economist has a working paper "An Overhaul of Federal Reserve Doctrine: Nominal Income and the Great Moderation." (Hat tip to David Beckworth.)
Hendrickson argues that the Fed became more responsive to changes in nominal GDP after 1979 and that this was responsible for the Great Moderation starting in 1979. He blames Burns and Miller for having a cost-push doctrine of inflation.
He shows that there was more response of the Federal Funds rate to changes in nominal income after 1979. He uses a dynamic stochastic model to that show that increasing the response of the Federal Funds rate to changes in nominal income reduce the variance of output relative to capacity and inflation.
I plan to give the paper more study, but for now, I have two questions.
While interest rate smoothing is probably something the Fed does, what happens to the volatility of output and inflation when interest rates are not smoothed?
And, more importantly, what happens if the Fed targets a growth path of nominal GDP, rather than changes in its growth rate?
I strongly recommend the paper. I found the literature review and bibliography very helpful.