Saturday, August 27, 2005

Understanding the Greenspan Standard

Friday, August 26, 2005; 2:42 PM

The papers presented at the Federal Reserve Bank of Kansas City's economic symposium today and Saturday are expected to be available to the public on the bank's Web site ( Monday. Until then, here is a summary by Washington Post economics reporter Nell Henderson of one of the main papers:

* "Understanding the Greenspan Standard," by Alan S. Blinder and Ricardo Reis of Princeton University. This paper was well-received by many symposium participants today. It highlights Alan Greenspan's most notable contributions to central bank policy during his 18 years as Fed chairman.

The paper focuses on the lessons learned from the "Greenspan Era," summarizing them in 10 main principles that could be followed by his successors. They include:

-- Keep your options open.
-- Do not let yourself get caught in an intellectual straitjacket.
-- Avoid policy reversals.
-- Forecasts, although necessary, are unreliable.
-- Most oil shocks should not cause recessions.
-- Do not try to burst bubbles; mop up after.

The authors say in the paper that they are not focusing on grading Greenspan's performance, but conclude that "when the score is toted up, we think he has a legitimate claim to being the greatest central banker who ever lived."

That said, the authors include some interesting criticisms: "We question the wisdom of a central bank head taking public positions on political issues unrelated to [Fed] policy. And we ask whether the extreme personalization of monetary policy under Greenspan has undercut his ability to pass any 'capital' on to his successor and/or has undermined the presumed advantages of making [Fed] policy by committee."

And for all Greenspan's significant progress in making the Fed more communicative-- by announcing and explaining its actions, providing guidance about the likely course of future actions and releasing the minutes of policymakers' meetings more quickly-- "the Greenspan Fed has been more of a laggard than a leader among central banks" in this area.


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