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August 27, 2005

The Top Ten Things We Have Learned From Alan Greenspan...

... according to Alan Blinder and Ricardo Reis, in a paper presented at the Federal Reserve Bank of Kansas City Fed's Jackson Hole policy conference.  I report, you decide:

Principle No. 1: Keep your options open – Blinder and Reis very much favor discretion over rules.

Principle No. 2: Don’t let yourself get caught in an intellectual straightjacket – The authors attribute Mr. Greenspan’s success, in part, to his willingness to cast-off received wisdom, as when the Committee abandoned all hope for monetary-aggregate targeting. They also cite the Chairman’s insistence in the latter 1990s that productivity gains made brisk GDP growth consistent with low and stable inflation.

Principle No.3: Avoid policy reversals – The rationale for a measured pace.

Principle No. 4: Forecasts, though necessary, are unreliable – Yet another rationale for a measured pace, and an argument for a let’s-look-at-the-data-that-seems-important-at-the-moment mode of analysis.

Principle No. 5: Formal optimization procedures work in theory, but risk management works better in practice – especially as a safeguard against very adverse outcomes – It takes a bunch of wise guys and gals – not a bunch of tooled-up egg-heads -- to make this whole monetary policy thing work.

Principle No. 6: Recessions are bad, as is growth below potential – In Blinder and Reis’ words, “The Greenspan standard… takes the Fed’s dual standard seriously.” They don’t suggest others in the Federal Reserve fail to take that seriously, just that the Chairman takes it really, really seriously. The contrast is with other central banks – the Bank of England and the ECB, for example – that do not have mandates for real activity on par with price stability objectives.

Principle No. 7: Most oil shocks should not cause recessions – The authors credit Greenspan with keeping the eye on the core-inflation ball, and thereby not unduly compromising the Fed’s growth objective chasing temporary price blips.

Principle No. 8: Don’t try to burst bubbles: mop up afterwards – It’s worked pretty well, say Blinder and Reis, so why tighten prematurely, which may or may not burst a bubble that may or may not exist?

Principle No. 9: The short-term real interest rate, relative to its neutral value, is a viable and sensible indicator of the stance of monetary policy – Although the introduction of the neutral rate is a relatively recent innovation in policy communications and speeches, Blinder and Reis seem to suggest that it is basically what the Chairman had in his head all along (a notion that is presumably consistent with the observation that the FOMC appears to have followed a Taylor rule during the Greenspan reign).

Principle No. 10: Set your aspirations high, even if you can’t achieve them – Go West, young man. No, that’s not it. Here it is: Fine-tune, fine-tune, fine-tune. If you’re really smart, you can make it work most of the time. 

One could read Blinder and Reis' analysis as a pretty direct challenge to the beliefs that central bank discretion should be limited, that inflation objectives should be the sole mandate for a central bank, and that better policy outcomes have been made possible by a Fed that has focused less on fighting economic downturns and more on containing price pressures. I list those in ascending order of disagreement (by my reading) with what have become some common, even if not universal, assumptions about how central banks ought to behave.  Is Mr. Greenspan's legacy really , as the authors might suggest, that some of that conventional wisdom ought to be rethought?

(The paper is not yet available on the KC Fed website -- I will link to it when it is.  Press reports can be found in the Washington Post and at MarketWatch.)

UPDATE: The Wall Street Journal Online has the story as well (hat tip, Mark Thoma).

UPDATE II: Dean Baker does his own summing up, at Max Sawicky's place.

UPDATE III: I'm a bir late on these, but New Economist offers more, here and here.

August 27, 2005 in Federal Reserve and Monetary Policy | Permalink


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» Dean Baker slams Greenspan's record from New Economist
While Brad DeLong is marvelling at the cell phone reception in Wyoming, and Mark Thoma and Dave Altig analyse various Jackson Hole papers, Dean Baker provides five reasons he was glad not to be invited to the Greenspanfest '05:Let’s get a few facts on ... [Read More]

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» [BOJ][economy]Japanese Translated Version of The Top Ten Things We Have Learned From Alan Greenspan... from bewaad institute@kasumigaseki
少々時間が経ってしまいましたが、macroblogにて紹介されたBlinderとReisによる中央銀行にとっての10の教訓、さて、日銀にはどれだけ当てはまっているのでしょうか? Principle No. 1: Keep your options open 第1の原則:選択の幅を広く保つべし Principle No. 2: Don't let yourself get caught in an intellectual straightjacket 第2... [Read More]

Tracked on Sep 24, 2005 1:01:18 PM


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