geenspan

GREENSPAN

There was a discussion of Greenspan as a Fed Chairman earlier today.

Different people were making various claims with no evidence to support their positions.

So I though I would put in my two cents worth, but provide a chart to show why I take the position on Greenspan I do.

The first chart is my Fed Policy index. It is my version of the Taylor rule, but the biggest
difference between my version and other versions is that this one gives inflation and
unemployment equal weights. Most Taylor rule approaches gives inflation a weight of some 2 to 3 times economic slack. The others use the GDP Gap rather then the unemployment rate, but the difference is not significant. Moreover, the GDP Gap is a quarterly series iso t is not available as quickly. This chart uses smoothed monthly data and on an unsmoothed basis the index is now at 4.8%. Other Taylor rule approaches generally says rates should have been higher in the pre-Volcker era and about the same in the Volcker era then they actually were.

This version says that Greenspan started office by tightening more then was necessary as in the late 1980s actual funds were higher then the rule implies they should have been. This obviously contributed to the 1990 recession.

But the index implies that through the 1990s Fed Policy was almost exactly what the index called for. In other words we could have programmed a computer to give us almost exactly the same policy that Greenspan actually produced. Maybe the more interesting question is, if Greenspan followed the same policy rules as pre-Volker Chairmen had, why did it generate such different results. This clearly implies that K Harris is correct to think that much of what Greenspan achieved was strictly a matter of luck. Or maybe it was the lagged impact of the unusual tightly policies Volcker implemented. But again in the early 1990s actual policy deviated from the policy index as policy was significantly more expansionary then the index implied it should have been. We are still not certain if that was the best policy.

In this chart I simply did a regression of actual funds against the index and a dummy variable for Volcker. It is just another way of showing that through the 1990s Greenspan
did almost exactly what my policy rule called for.