[gborrego1991]

How do we respond to individuals who claim that during 1983-2000, the FED did a good job of stabilizing the economy? Are there any resources you can point me to arguing the contrary?

[jim]

The “1983-2000, the FED did a good job of stabilizing the economy” is fully consistent with Austrian Business Cycle Theory (ABCT). Mises, Heyek, et al teach that money creation by a central bank will generate economic activity especially in capital goods. The problem is this boom is doomed. It represents allocations of available capital to projects that will fail (i.e. the Dot Com Bubble). The Austrians recognize the response to the ultimate economic crises is to allow the liquidation of these failed enterprises (let the bankruptcies remove the bad projects and their authors from the scene).

[jmherbener]

The so-called Great Moderation occurred in the industrialized world, not just the U.S. Here is the evidence:

http://www.kansascityfed.org/publicat/econrev/pdf/3q05summ.pdf

As Ben Bernanke has pointed out, the volatility of real GDP was lower before the 1970s and after the 1970s. Here is Bernanke’s article:

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2004/20040220/default.htm

So the explanation for the Great Moderation has to do with the breakup of Bretton-Woods. Before 1971, there was an international monetary system that to a certain degree coordinated world-wide inflation with the dollar. When the Fed inflated if gave other countries room to inflate their currencies as dollars wound up in those countries through foreign exchange. Part of the impact of Fed monetary inflation was felt overseas and, if coordinated with other countries, resulted in less dramatic booms and busts.

Bretton-Woods began to unravel in the late 1960s. When it collapsed in 1971, countries allowed their currencies to float (albeit a managed float). When the Fed inflated, the full impact was felt in the U.S. and thus, more volatility in the economy.

In the 1980s, the U.S. put a dollar reserve standard, with pegged exchange rates, back in place. When the Fed inflated the dollar, more dollars were held overseas through foreign exchange and became reserve for the expansion of domestic currencies. This smoothed out the business cycle in industrialized world, but made it more volatile in the less industrialized world. Places like southeast Asia, in particular. After the collapse in southeast Asia beginning in 1997, the effect of Fed inflation was felt more in the U.S. and we had the DotCom bubble followed by the housing bubble.

[jim]

After reading the paper by Peter Summers, I find it most unconvincing. 1. Arriving at GDP is a process of aggregating thousands of sets of diverse data. 2. Arriving at this aggregate for 37 discrete GDPs (1966-2002) where the the sets of data for each year’s GDP would contain new array of data from the previous year (if accurately compiled). 3. Inflation is never actually defined (CPI, PPI, money supply, M1, M2, M3, etc.). 4. How often were the rules for calculating the aggregate change across the years from 1966-2002? 5. Is it too cynical to suggest that numbers are often fudged for the current administration? 7. a. Finally the thesis: The Great Moderation happened as a result of improved monetary policy, 7. b. The source: Peter M. Summers is an assistant economics professor at Texas Tech University. This
article was written while he was a visiting scholar at the Federal Reserve Bank of
Kansas City. Matthew Cardillo, an associate economist at the bank, helped prepare
the article. The article is on the bank’s website at http://www.kansascityfed.org

[jmherbener]

I, too, disagree with the analyses given by Summers and Bernanke. The links to their articles were to provide background about what the Great Moderation was. Unfortunately, there isn’t much literature on the Great Moderation from Austrians. Joe Salerno made a few comments in his Congressional testimony. But they are disputing the claim that the GM was moderate.

http://financialservices.house.gov/media/pdf/031711salerno.pdf

[gborrego1991]

Thank you, Mr. Herbener. I did some research and found this interview with George Selgin on the Federal Reserve (http://www.econtalk.org/archives/2010/12/selgin_on_the_f.html)

He mentions the Great Moderation around the 45:00 mark. He uses your argument as a probable cause, along with others.

There is also this article by Selgin, and Lawrence White which also mentions the “Great Moderation”. http://www.cato.org/pubs/researchnotes/WorkingPaper-2.pdf

[dajepson]

It depends on how you define “doing a good job.” If you accept the simplistic premise of modern economic discussion that an economy can be evaluated by “GDP good, inflation bad”, then yes, perhaps we should indeed be singing the praises of Greenspan et al.

But of course, economic reality does not unfold along only those two dimensions – there are many other factors we need to consider as well. For example, in The Signal and The Noise, Nate Silver notes that much of the GDP growth associated with the Great Moderation was “fueled by large increases in government and consumer debt, along with various asset-price bubbles.” Of course, he draws completely the wrong conclusion from that observation, but at least he acknowledged it.

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