Has the US Economy Exhibited Less Uncertainty during the Greenspan Era

INTRODUCTION It is well recognized that Allan Greenspan was among the best Chairman in the history of central banks, guiding the U.S. economy through a prolonged period of economic growth and stability, throughout the 1980s and 1990s. However, it is difficult to measure a Federal Reserve Chairman's or a central bank's performance, and to compare central banks' performance, in part because economies exhibit different growth rates, inflation and interest rates at different stages of development, and each economy has its own particular natural, cultural, and political conditions and environments, and the differences may sometimes dominate the role of a central bank. There are numerous studies comparing the conduct and performance of monetary policies of the Volcker-Greenspan period to those of the pre-Volcker period (Clarida, Gali & Gertler, 2000; Mankiw, 2002; Gamber & Hakes, 2006; Dennis, 2004; Fair, 2007). The researchers find that monetary policies during the Volcker-Greenspan period have been more efficient and more reactive to changes in expected inflation. There are several cross-country empirical studies on relationship between policy efficiency and macroeconomic performance (Cecchetti & Krause, 2001; Cecchetti, Flores-Lagunes & Krause, 2004). Good conduct of monetary policy or simply reduced supply shocks contribute to good macroeconomic performance. Cecchetti, Flores-Lagunes, and Krause (2004) find that more efficient policy explains 80% of the improvement in macroeconomic performance in 20 out of 21 countries they study. Ahmed, Levin, and Wilson (2004) and Kahn, McConnell, and Perez-Quiros (2002) discuss the sources of reduced output volatility and those of reduced price volatility, both agree that policy is the likely source of stability in inflation. Blanchard and Simon (2001) identify a decline in output volatility since the 1950s and trace to several proximate causes. They find little evidence that the absence of large shocks is the reason of the decline in output volatility. In this study, we compare the macroeconomic performance in three different countries. Our purpose of this study is to use simple, straightforward calculations to show whether the American people enjoyed better economic conditions in the Greenspan era than did people in Canada and in the United Kingdom, since the Fed's and the other two central banks' policies may have played an important role in the performance of the economy. We do not attempt to trace the causes of the macroeconomic performances in this study since there is already a broad agreement on the importance of monetary policy. We examine and compare relative measures, such as the ratios of inflation to unemployment, inflation to GDP growth, employment and interest rate to GDP growth. We select Canada and the United Kingdom for comparison because these two countries are the most similar to the United States in terms of culture, political system, and stage of economic development. Is the difference in performances of the three countries caused by their different policy goals? Canada and United Kingdom adopted inflation targets in 1991 and 1992, respectively, while the United States does not have formal inflation targets. Dueker and Fischer (2006) find little evidence that inflation-targeting monetary policies outperform given the same circumstances. This is the case when they compare the inflation performances of Canada and the United States. The extensive survey of empirical studies by Dueker and Fischer (2006) provide similar conclusions. Cecchetti and Ehrmann (2002) analyze 23 countries in the pre EMU period and find that inflation targets did not cause difference in the patterns of inflation and output volatilities. A common explanation for this is that the successful non-inflation targeters' practices converge to those of inflation targeters (Bernanke et al., 1999; Mishkin, 2002). According the Federal Reserve's mission statement, its first duty is Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates. …

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