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HenryTo
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 Posted: Wed Jan 23, 2008 12:33 am Post subject: William Poole: Understanding Inflation |
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A must-read for those who want to study the 1970s inflationary spiral. This speech discusses the lessons learned from the 1970s inflationary spiral as well as the causes - and argues why a "policy regime" is necessary for a sound monetary policy (i.e. one in which we can achieve price stability) going forward.
http://www.stlouisfed.org/news/speeches/2007/04_02_07.html
| Quote: | When policy departs from usual practice, it is incumbent that policymakers communicate the change—its nature and rationale—carefully to the public. Monetary policy is more powerful, and better able to achieve its goals, if the forward-looking behavior of consumers and businesses is consistent with the forward-looking behavior suggested by the policy rule or regime. For several years, I have referred to this as “synching” the markets and monetary policy. The fundamental mechanism for making synching work is communicating the policy regime or rule—but rule-like behavior must be adopted by policymakers in the first place before it can be communicated to the public.
During the latter 1970s, the FOMC’s minutes, transcripts and public statements suggest frustration with an economy in which inflation increased with ease but decreased reluctantly; the Committee’s response was the monetary policy reform of October 1979. Two years ago, we held a special conference at the St. Louis Fed, on the occasion of the 25th anniversary of reform, to reflect on that monetary policy change. The papers from the conference are available in a special issue of our Review. In the conference opening remarks, Chairman Alan Greenspan noted that by 1979 the inflation situation had deteriorated to such an extent that “if the Fed had not opted to initiate a sharp interest rate increase in this country, the market would have done it for us.” He emphasizes that the 1970s inflation experience reinforces the role of price stability as a prerequisite for the efficient allocation of resources in the economy and for fulfilling the Fed’s goal of promoting maximum sustainable economic growth.
Allan Meltzer, in his paper for the conference, considered a wide variety of explanations, including political business cycles, dynamic inconsistency in policymaking, and the use of incorrect economic theories and data. He concludes that the policy failure was so large that no single theory can account for it—multiple, mutually reinforcing failures are required. Among these was the failure of FOMC members to distinguish between the corrosive effects of more rapid inflation as a cause of slower economic activity, because inflation increased uncertainty, and their fear that seeking to reduce inflation would, itself, further slow economic activity. Today, we appreciate that slowing inflation in the absence of a clearly defined and well-articulated policy regime will be costly—the concerns of these Committee members were well-founded. We also understand, however, that a clear policy regime focused on price stability can sharply reduce, if not eliminate, the likelihood of finding ourselves in such a situation. |
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HenryTo
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Location: Houston, Texas & Los Angeles, California
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rffrydr
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Location: Sunny California
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| Posted: Sun Apr 20, 2008 9:39 am Post subject: |
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Policy doesn't lead, it follows. Even when it leads, it follows. Greenspan's (and Ben's) "Humpty-Dumpty" policy of picking up pieces is testament to that, if nothing else.
In the 70's policy failure was part of the mix--as it always is. And like all historical events had many "causes." --Most of which are mistaken symptoms. The seventies were one era when demography was destiny. Not just the numbers of the baby-boomers but their reaction to their fathers--their culture.
This is true even on the most abstract level:
http://www.economist.com/science/displaystory.cfm?story_id=10952783
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