|
|
|
|
Monetary Policy in the Face of Uncertainty
By Alan Greenspan
Introduction
For the past two decades, central bankers have largely been successful at subduing the inflationary pressures that threatened to upend market-oriented economic systems a generation ago. The Federal Reserve, during this period, has squeezed out an inflationary excess of liquidity. In Europe, tolerance for inflation has declined dramatically, and a commitment to price stability—long the hallmark of Bundesbank policy—has gained widespread acceptance.
In the past five years or so, two new trends have greatly assisted this process in the United States. One has been the serendipitous emergence of a once- or twice-in-a-century surge in technology. Without the accompanying boost to productivity, our progress toward price stability might well have been marked by the social pressures that arose in many previous episodes of disinflation both here and abroad. The other trend was the growing political commitment to address an outsized federal budget deficit that was absorbing an inordinate share of our national saving. That change in our political environment— accompanied by the faster pace of technology-driven growth—has resulted in a sharp reduction in the unified budget deficit and, more recently, the emergence of a significant surplus. This, in turn, has helped fill the pool of saving that has fed productivity-enhancing and cost-reducing capital formation.
A number of elements came together to make this economic configuration possible. The essential ingredient was the public support that developed as the growth-inhibiting consequences of the inflation of the 1970s became manifest. Without this public recognition and support, it would have been difficult to establish the stable macroeconomic foundation upon which the private sector has built so productively in recent years.
By now, the story of the boom in information technology is well known, and nearly everyone perceives that the resulting more rapid growth of labor productivity is at least partly enduring. Capital deepening has surged during the past seven years, and innovations, synergies, and networking effects have boosted significantly the growth of multifactor productivity. With output per hour having accelerated, cost pressures have been patently contained.
For the most part, the Federal Reserve generally recognized these changing fundamentals and calibrated American monetary policy accordingly. Although we have learned much about managing the financial backdrop to accelerating economic activity, it is essential that we not be deluded into believing that we have somehow discovered the Rosetta stone of monetary policy. A failure by policymakers to sufficiently appreciate the inevitable uncertainties that they confront could result in unfortunate consequences for the economy.
Full Text (PDF, 8 pages, 41 KB)