Academic journal article ABA Banking Journal

Did the Fed Blink? (the Economy)

Academic journal article ABA Banking Journal

Did the Fed Blink? (the Economy)

Article excerpt

THE FEDERAL RESERVE UNDER the chairmanship of Alan Greenspan is widely credited with conducting monetary policy well. Yet, significant misgivings exist about the economic course that lies ahead. The source of those concerns often may originate in areas outside of the Fed's responsibility. Some, however, may be traced to Fed's own decisions--particularly those made over the past several years.

When the Fed embraced monetarism during the late 1960s and 1970s, there was considerable hope that monetary policy might be put on a comparatively scientific footing. By actively utilizing the federal funds rate to control the money supply, proponents of monetarism claimed that the Fed could exercise effective control over both real economic activity and, especially, inflation. For a time a limited form of monetarism was implemented in the conduct of monetary policy.

Financial deregulation in 1980, however, signaled a coming onslaught of financial innovation and the presumptive end to monetarism as an effective approach for conducting monetary policy. Indeed, emphasis on controlling money was abandoned officially during the 1990s.

In its place, the Taylor Rule, developed by John Taylor of Stanford University, became the new theoretical touchstone for policy making. Under this rule, the Fed would set the federal funds target in direct response to deviations between realized and desired levels of inflation and between the actual and potential levels of economic activity (the output gap). By collapsing the implicit trade-offs that arise when pursuing both inflation and output targets into a simple formula, Taylor provided an attractive alternative to monetarism. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.