DOCSLIB.ORG

The Economic Importance of Being Educated, Forefront, Fall, 2010, Vol

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
The Economic Importance of Being Educated, Forefront, Fall, 2010, Vol FALL 2010 Volume 1 Number 3 F refront New Ideas on Economic Policy from the FEDERAL RESERVE BANK of CLEVELAND The Economic Importance of Being Educated INSIDE: Early Childhood Education Consumer Finance Mortgage Counseling PLUS: Q&A with Laurence Meyer F refrontrefrontF New Ideas on Economic Policy from the FEDERAL RESERVE BANK of CLEVELAND 6 FALL 2010 Volume 1 Number 3 CONTENTS 1 President’s Message 2 Reader Comments 4 Upfront Battling the next phase of the housing crisis 6 Stop Investing in Stadiums… Start Investing in Kids Interview with Art Rolnick 10 Mortgage Counseling, Plain Language, and Financial Education: What Works? Highlights from the 2010 Community Development Policy Summit 14 Five Big Ideas about Consumer Finance Education Observations of a Federal Reserve researcher 14 18 Overextended, Underinvested: e Debt Overhang Problem Economists explain how debt kills investment 22 Interview with Laurence Meyer Former Federal Reserve governor on the state of macroeconomics 28 Book Review 18 e Big Short: Inside the Doomsday Machine President and CEO: Sandra Pianalto Editor-In-Chief: Mark Sniderman, Executive Vice President and Chief Policy Offi cer 22 Managing Editor: Robin Ratliff Editor: Doug Campbell Associate Editors: Amy Koehnen, Michele Lachman Art Director: Michael Galka The views expressed in Forefront are not necessarily those of the Designer: Natalie Bashkin Federal Reserve Bank of Cleveland or the Federal Reserve System. Web Managers: Stephen Gracey, David Toth Content may be reprinted with the disclaimer above and credited Contributors: to Forefront. Send copies of reprinted material to the Public Aff airs Dan Littman Anne O’Shaughnessy April McClellan-Copeland Andrea Pescatori Department of the Cleveland Fed. Filippo Occhino Jennifer Ransom Forefront Editorial Board: Federal Reserve Bank of Cleveland Ruth Clevenger, Vice President, Community Development PO Box 6387 Kelly Banks, Vice President, Community Relations Cleveland, OH 44101-1387 Stephen Ong, Vice President, Supervision and Regulation James Savage, Vice President, Public Aff airs [email protected] Mark Schweitzer, Senior Vice President, Research clevelandfed.org/forefront James Thomson, Vice President, Research CHRIS PAPPAS Meyer was a professor of economics for 27 years and former department chairman at Washington University. In 1982, he Interview with launched the economic consulting fi rm Laurence H. Meyer and Associates and earned a reputation as one of the nation’s Laurence Meyer leading forecasters. He was named to the Federal Reserve Board of Governors in 1996. His term on the Board lasted until 2002, after which he rejoined his old fi rm, now called Macro- economic Advisers. “ By the time I completed my fi rst economics class in college, Meyer is a fellow of the National Association of Business I knew I wanted to be an economist.” The college was Yale and Economics, a director of the National Bureau of Economic the narrator was Laurence Meyer, writing in his 2004 book, Research, a scholar with the American Council on Capital A Term at the Fed: An Insider’s View. Meyer did indeed go on Formation, and a member of the Panel of Economic Advisers to become an economist. And not just any economist, but a for the Congressional Budget Offi ce. He received a BA from top-fl ight academic, a central banker, and a principal of one of Yale University and a PhD from the Massachusetts Institute the globe’s leading economic forecasting fi rms. of Technology. What may separate Meyer from so many other economists Mark Sniderman, executive vice president and chief policy is his ability to commu nicate well. The Boston Sunday Globe offi cer at the Federal Reserve Bank of Cleveland, interviewed noted that “Meyer writes about complex economic issues in Meyer on June 9, 2010, in Cleveland. An edited transcript a clear style.” follows. 22 Fall 2010 Sniderman: Larry, thanks so much for as a multiplier. All these things were integrate that. And the other is credit talking with me this afternoon. I’m going to happen, and now they hap- spread variables—Baa corporate rate looking forward to a great conversation. pened, and the unwinding was much relative to, say, a Treasury rate. Th e Let me start with the fi nancial crisis. I’m uglier than it otherwise would have reason that’s important is that a risk interested in your views at a big-picture been. Practices evolve more quickly variable gives an indication of the risk level. How did this all happen? than knowledge. Maybe we weren’t appetites and risk aversion that come Meyer: It’s probably not a good idea to humble enough about what we under- into the system when there are fi nan- think that there’s one single fl aw in stood as bankers, as supervisors, as cial crises. And that variable tends to the system that was exposed. I think rating agencies, or as macroeconomists. be very important in spending equa- that there were several factors. One Sniderman: What does that tell us tions as well. was rapid fi nancial innovation—new about the state of macro modeling? fi nancial products that weren’t tested Meyer: It tells us something very by market downturns and that changed important —something we certainly or morphed as they were being should have learned—that macro developed. Th is is the explosion of modeling should not be static. It subprime. It morphed from being one has to evolve over time, and we’re thing to being something completely continuously learning. We fi nd holes, diff erent and much riskier later on. and we try to close those holes. And the same thing with securitization, But we know in the future there will a new technique, very valuable, and a be crises coming, or shocks in areas very good idea, but then it morphed that we didn’t anticipate. We’ll fi nd again into very complex forms of new holes that we have to fi ll. In this structures that nobody could under- case, there were really so many. stand. I think those fi nancial innova- Th is notion of the fi nancial accelerator tions are very important, and they set wasn’t just a cute idea that the [Federal We didn’t see the fundamental up the system with expanding risk and Reserve] chairman [Ben Bernanke] concentrated risks that weren’t well connection between property busts came up with. It was central to our understood. understanding of how the macro- and collateral in the banking system, Second, there’s always a trigger that economy works, particularly when bringing the banking system toward happens, and the trigger was declining there are intense changes in fi nancial home prices. Many of us believed that conditions. So you do get these adverse insolvency, toward the edge of the home prices never fall. Th ere’s a good feedback loops that the fi nancial abyss. Put on top of that the buildup historical record of that. I think we all accelerator is all about. appreciate now that the subprime of leverage in the system—this acts Most of us as macro modelers came market was not viable if home prices as a multiplier. out of a tradition in which the trans- fell. But since we didn’t think home mission of monetary policy, the prices would fall, we didn’t worry fi nancial sector, is about real interest Sniderman: Should we expect to be about it. rates, about equity values, about the living with our mainstream workhorse Th en third, we just took too narrow dollar, with virtually no variables that macro models for some time, and should a view of the subprime problem. I we would call credit variables—they we feel good about that? Is there enough myself, and I think more generally just weren’t there. In milder times, progress there? many macroeconomists, had this that was OK. Th at probably got the Meyer: I love that question! So I think focus that it’s about subprime— job done. But when the situation we have two kinds of modeling tradi- relative to total mortgages, housing was the drying up of credit markets, tions. First there is the classic tradition. relative to the economy —we’re talking dysfunctional credit markets, you I was educated at MIT. I was a research about tenths [fractions]. How can that simply had to give the model more assistant to Franco Modigliani, Nobel be a problem? information than otherwise. laureate and the director of the project on the large-scale model that was used We didn’t see the fundamental Two things seem valuable that we’ve at the time at the Federal Reserve connection between property busts tried to integrate into our models. Board. Th is is the beginning of modern and collateral in the banking system, First would be “willingness to lend macro-econometric model building. bringing the banking system toward variables” from the senior loan offi cer Th at’s the kind of models that I would insolvency, toward the edge of the survey. Imprecise as it may be, it is use, the kind of models that folks at abyss. Put on top of that the buildup a measure of lending terms beyond the Board use. of leverage in the system—this acts rates. Th at’s very important and that wasn’t there, and I think we can F refrontF refront 23 Laurence H. Meyer Current Position: Economic Forecasting Awards: Vice Chairman, Director, and Co-Founder, Business Week, 1986 Macroeconomic Advisers Blue Chip Economic Indicators, 1993 and 1996 Past Positions: Education: Professor of Economics, Washington University Yale University, BA, 1965 Federal Reserve Governor, 1996–2002 Massachusett s Institute of Technology, PhD, 1970 Associations: Board of the National Economic Bureau of Economic Research Fellow of the National Association of Business Economists Th ere’s also another tradition that My views would be considered out- to do in the smaller, modern macro began to build up in the late seventies rageous in the academic community, models.
Load more

Recommended publications
  • Conduct of Monetary Policy, Report of the Federal Reserve Board, July 24
    CONDUCT OF MONETARY POLICY HEARING BEFORE THE COMMITTEE ON BANKING AND FINANCIAL SERVICES HOUSE OF REPRESENTATIVES ONE HUNDRED FIFTH CONGRESS FIRST SESSION JULY 24, 1997 Printed for the use of the Committee on Banking and Financial Services Serial No. 105-25 U.S. GOVERNMENT PRINTING OFFICE 42-634 CC WASHINGTON : 1997 For sale by the U.S. Government Printing Office Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 ISBN 0-16-055923-5 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES JAMES A. LEACH, Iowa, Chairman BILL MCCOLLUM, Florida, Vice Chairman MARGE ROUKEMA, New Jersey HENRY B. GONZALEZ, Texas DOUG BEREUTER, Nebraska JOHN J. LAFALCE, New York RICHARD H. BAKER, Louisiana BRUCE F. VENTO, Minnesota RICK LAZIO, New York CHARLES E. SCHUMER, New York SPENCER BACHUS, Alabama BARNEY FRANK, Massachusetts MICHAEL N. CASTLE, Delaware PAUL E. KANJORSKI, Pennsylvania PETER T. KING, New York JOSEPH P. KENNEDY II, Massachusetts TOM CAMPBELL, California FLOYD H. FLAKE, New York EDWARD R. ROYCE, California MAXINE WATERS, California FRANK D. LUCAS, Oklahoma CAROLYN B. MALONEY, New York JACK METCALF, Washington LUIS V. GUTIERREZ, Illinois ROBERT W. NEY, Ohio LUCILLE ROYBAL-ALLARD, California ROBERT L. EHRLICH JR., Maryland THOMAS M. BARRETT, Wisconsin BOB BARR, Georgia NYDIA M. VELAZQUEZ, New York JON D. FOX, Pennsylvania MELVIN L. WATT, North Carolina SUE W. KELLY, New York MAURICE D. HINCHEY, New York RON PAUL, Texas GARY L. ACKERMAN, New York DAVE WELDON, Florida KEN BENTSEN, Texas JIM RYUN, Kansas JESSE L. JACKSON JR., Illinois MERRILL COOK, Utah CYNTHIA A.
    [Show full text]
  • Mark W Olson: the Federal Open Market Committee and the Formation of Monetary Policy (Central Bank Articles and Speeches)
    Mark W Olson: The Federal Open Market Committee and the formation of monetary policy Remarks by Mr Mark W Olson, Member of the Board of Governors of the US Federal Reserve System, at the 26th Conference of the American Council on Gift Annuities, Orlando, Florida, 5 May 2004. * * * Thank you very much for inviting me here this evening. When my longtime friend Lance Jacobson extended this invitation more than a year ago, I readily accepted. Several months later, the 2004 calendar of Federal Open Market Committee (FOMC) meetings was released, and I discovered that this meeting would occur on the day following the Committee's May meeting. Because FOMC members observe a blackout on discussions of the economy for the week before and the week of the FOMC meetings, I prefer not to talk about current economic conditions. However, I can provide you with some insight into the way the FOMC functions and the impact of monetary policy on the U.S. and global economies. My former Federal Reserve colleague Laurence Meyer provided the blueprint for this presentation in a 1998 speech entitled “Come with Me to the FOMC.”1 That title, in turn, was borrowed from remarks given back in 1951. While my remarks are not identical in either style or substance, I have borrowed heavily from Larry's presentation, and you have the assurance that they have a long history. First, a comment or two on who we are. Nineteen policymakers participate in FOMC meetings, although at most only twelve vote at any one time. At times vacancies on the Board mean that the FOMC has fewer than twelve voting members.
    [Show full text]
  • Appointing Central Bankers
    CY241/Chang-FM 0521823331 June 2, 2003 13:1 Char Count= 0 APPOINTING CENTRAL BANKERS The Politics of Monetary Policy in the United States and the European Monetary Union KELLY H. CHANG v CY241/Chang-FM 0521823331 June 2, 2003 13:1 Char Count= 0 PUBLISHED BY THE PRESS SYNDICATE OF THE UNIVERSITY OF CAMBRIDGE The Pitt Building, Trumpington Street, Cambridge, United Kingdom CAMBRIDGE UNIVERSITY PRESS The Edinburgh Building, Cambridge cb2 2ru, uk 40 West 20th Street, New York, ny 10011-4211, usa 477 Williamstown Road, Port Melbourne, vic 3207, Australia Ruiz de Alarcon´ 13, 28014 Madrid, Spain Dock House, The Waterfront, Cape Town 8001, South Africa http://www.cambridge.org C Kelly H. Chang 2003 This book is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2003 Printed in the United States of America Typeface Sabon 10/13 pt. System LATEX 2ε [tb] A catalog record for this book is available from the British Library. Library of Congress Cataloging in Publication data available isbn 0 521 82333 1 hardback vi CY241/Chang-FM 0521823331 June 2, 2003 13:1 Char Count= 0 Contents List of Figures page x List of Tables xi Acknowledgments xiii 1 Introduction 1 1.1 The Book’s Main Questions 3 1.2 Question 1: Do Politicians Influence Monetary Policy through Appointments? 4 1.3 Question 2: Who Influences Appointments? 7 1.4 Question 3: What Explains the Structure of Federal Reserve
    [Show full text]
  • The Buttonwood Gathering New York, October 25 - 26, 2010 the Graduate Center/City University of New York
    The Buttonwood Gathering New York, October 25 - 26, 2010 The Graduate Center/City University of New York About the event At last year’s Buttonwood Gathering, National Economic Council Director Larry Summers called on banks to accept the responsibility of greater regulation as a service to their country. Have they taken his words to heart? As the news continues to tell of a weak and jobless recovery, are banks and other financial institutions living up to their responsibilities? Once again in 2010, The Buttonwood Gathering will draw together leading policymakers, banking executives and regulators to discuss restoring trust in the financial system and evaluate our place on the road to recovery. Chair person John Micklethwait, Editor-in-Chief, The Economist The Bagehot lecture Mervyn King, Governor, Bank of England Confirmed speakers Mark Almeida, President, Moody’s Analytics Clifford Asness, Managing & Founding Principal, AQR Capital Management Zanny Minton Beddoes, Economics Editor, The Economist Matthew Bishop, American Business Editor, New York Bureau Chief, The Economist Joshua Bolten, Visiting Professor, Princeton University Joyce Chang, Managing Director and Global Head of Emerging Markets Strategy and Credit Research, JPMorgan James Chanos, Founder and Managing Partner, Kynikos Associates Ed Clark, President and Chief Executive Officer, TD Bank Financial Group Philip Coggan, Capital Markets Editor and Buttonwood Columnist, The Economist Sean Dobson, Chairman and Chief Executive Officer, Amherst Securities Group Former Senator Pete
    [Show full text]
  • Economic Policy in Uncertain Times
    Conference Proceedings th ANNUAL HYMAN P. MINSKY CONFERENCE ON FINANCIAL MARKETS Recession and Recovery: 12Economic Policy in Uncertain Times April 25, 2002 Roosevelt Hotel, New York City A conference of The Levy Economics Institute of Bard College LEVY INSTITUTE Contents Foreword Program Speakers Wynne Godley 1 Anthony M. Santomero 10 Gary H. Stern 17 Sessions 1. The State of the U.S. Economy: A View from Wall Street 21 2. Macroeconomic Issues in the Recovery 26 Participants 31 The proceedings consist of edited transcripts of the speakers’ remarks and summaries of session participants’ presentations. Foreword For those of you not familiar with his work, Hyman P. Minsky’s professional career spanned more than four decades. After receiving a Ph.D. in economics from Harvard University, he began his professional career at the University of California, Berkeley, then traveled to Washington University in St. Louis. After retiring from academia, he became a Distinguished Scholar at the Levy Economics Institute, where he remained until his death in 1996. Minsky studied and documented the conditions that produced a sequence of booms, govern- ment intervention to prevent debt contraction, and new booms entailing the progressive buildup of new debt that eventually left the economy financially fragile. This conference marks the 12th annual event at which we honor both Hy and his work by examining both the state of the financial sector and its relation to the real economy. The theme of this year’s conference is very Minskian in that it seeks to examine the causes of the U.S. recession that officially started in March 2001, while assessing the many cheerful yet cautionary forecasts of the good times having once again begun.
    [Show full text]
  • Understanding the Greenspan Standard
    Commentary: Understanding the Greenspan Standard John B. Taylor No matter what metric you use, the Greenspan era gets exceedingly high marks for economic performance. The era always will be remembered for its price stability—with declining and now low, stable inflation—and for its economic stability—with only two historically short, mild recessions and three long expansions. An indi- cation of how different things are in the Greenspan era is that the current expansion is already one of the longest in American history. Alan Blinder and Ricardo Reis have provided us with a comprehen- sive evaluation of the Greenspan era, shedding light on key policy issues and controversies. I particularly liked their behind-the-scenes review of the move toward greater transparency. And I agree with their overall evaluation of Alan Greenspan that “when the score is toted up, we think he has legitimate claim to be the greatest central banker who ever lived.” Evaluating policy with a monetary policy rule The core of the Blinder-Reis paper is an evaluation of monetary policy through the lens of a policy rule, in particular the Taylor rule. Blinder and Reis find that this rule fits the Greenspan era very well. 107 108 John B. Taylor They then use the estimated rule for a number of purposes. They use it to identify key episodes, defined as the deviations from the rule. They also use the rule to back out Alan Greenspan’s implicit esti- mate of the natural rate of unemployment and to assess the correct response to a change in productivity growth.
    [Show full text]
  • Policy, Monetary
    iess_Batch7N-Z 7/6/07 12:18 PM Page 245 Policy, Monetary changed the location of conflicts. Terrorism may be con- Engler, Robert. 1961. The Politics of Oil: A Study of Private sidered a form of guerrilla warfare, in contrast to a set- Power and Democratic Directions. New York: Macmillan. piece war. In response to this shift in theaters and tactics, Library of Congress Business References Service. 2005–2006. Western governments alleged that certain Arab Muslim History of the Oil and Gas Industry. Business and Economics states were “sponsors” of these acts of terror or gave safe Research Advisor (BERA) 5/6. http://www.loc.gov/rr/business/BERA/issue5/history.html. haven to terrorists. Western states directed military and economic sanctions against these states, which included Mir-Babayev, Mir Yusif. Azerbaijan’s Oil History: A Chronology Leading Up to the Soviet Era. 2002. Azerbaijan International Iran, Libya, Sudan, Somalia, Afghanistan, and Iraq. It is 10 (2). not without significance that all these states either have Razavi, Hossein, and Fereidun Fesharaki. 1991. Fundamentals of petroleum reserves or stand athwart transportation routes Petroleum Trading. New York: Praeger. to world petroleum markets. Somalia, for example, con- Sampson, Anthony. 1975. The Seven Sisters: The Great Oil trols the approach to the Red Sea and the Suez Canal. Companies and the World They Shaped. New York: Viking. Since 1980 five major wars have been fought in the Snow, Keith Harman. 2007. The New Old “Humanitarian” region: the Soviet-Afghanistan War (1979–1989), the Warfare in Africa, Part II. Somali Times, February 7. Iraq-Iran War (1980–1988), the Persian Gulf War U.S.
    [Show full text]
  • The Macroeconomist As Scientist and Engineer
    The Macroeconomist as Scientist and Engineer N. Gregory Mankiw Harvard University May 2006 N. Gregory Mankiw is the Robert M. Beren Professor of Economics, Harvard University, Cambridge, MA. I am grateful to Steven Braun, James Hines, Donald Marron, David Romer, Andrei Shleifer, Timothy Taylor, Michael Waldman, and Noam Yuchtman for helpful comments. Economists like to strike the pose of a scientist. I know, because I often do it myself. When I teach undergraduates, I very consciously describe the field of economics as a science, so no student would start the course thinking he was embarking on some squishy academic endeavor. Our colleagues in the physics department across campus may find it amusing that we view them as close cousins, but we are quick to remind anyone who will listen that economists formulate theories with mathematical precision, collect huge data sets on individual and aggregate behavior, and exploit the most sophisticated statistical techniques to reach empirical judgments that are free of bias and ideology (or so we like to think). Having recently spent two years in Washington as an economic adviser at a time when the U.S. economy was struggling to pull out of a recession, I am reminded that the subfield of macroeconomics was born not as a science but more as a type of engineering. God put macroeconomists on earth not to propose and test elegant theories but to solve practical problems. The problems He gave us, moreover, were not modest in dimension. The problem that gave birth to our field—the Great Depression of the 1930s— was an economic downturn of unprecedented scale, including incomes so depressed and unemployment so widespread that it is no exaggeration to say that the viability of the capitalist system was called in question.
    [Show full text]
  • Econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics National Bureau of Economic Research (NBER) (Ed.) Periodical Part NBER Reporter Online, Volume 2006 NBER Reporter Online Provided in Cooperation with: National Bureau of Economic Research (NBER), Cambridge, Mass. Suggested Citation: National Bureau of Economic Research (NBER) (Ed.) (2006) : NBER Reporter Online, Volume 2006, NBER Reporter Online, National Bureau of Economic Research (NBER), Cambridge, MA This Version is available at: http://hdl.handle.net/10419/61989 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu NBER Reporter NATIONAL BUREAU OF ECONOMIC RESEARCH Reporter OnLine at: www.nber.org/reporter SUMMER 2006 Program Report IN THIS ISSUE Program Report: Industrial Organization 1 Industrial Organization Research Summaries: Europe 8 Consumer Demand for Health Insurance 10 Nancy L.
    [Show full text]
  • Interview with Laurence H. Meyer Former Member, Board of Governors of the Federal Reserve System
    Federal Reserve Board Oral History Project Interview with Laurence H. Meyer Former Member, Board of Governors of the Federal Reserve System Date: October 6, 2010; October 18, 2010; and November 18, 2010 Location: Washington, D.C. Interviewers: Winthrop P. Hambley and David H. Small Federal Reserve Board Oral History Project In connection with the centennial anniversary of the Federal Reserve in 2013, the Board undertook an oral history project to collect personal recollections of a range of former Governors and senior staff members, including their background and education before working at the Board; important economic, monetary policy, and regulatory developments during their careers; and impressions of the institution’s culture. Following the interview, each participant was given the opportunity to edit and revise the transcript. In some cases, the Board staff also removed confidential FOMC and Board material in accordance with records retention and disposition schedules covering FOMC and Board records that were approved by the National Archives and Records Administration. Note that the views of the participants and interviewers are their own and are not in any way approved or endorsed by the Board of Governors of the Federal Reserve System. Because the conversations are based on personal recollections, they may include misstatements and errors. ii Contents October 6, 2010 (First Day of Interview) .................................................................................... 1 Educational and Professional Background ....................................................................................
    [Show full text]
  • NAIRU: Dangerous Dogma at the Fed
    DECEMBER 2000 NAIRU: Dangerous Dogma at the Fed BY DEAN BAKER The Full Employment and Balanced Growth Act of 1978 established two goals to guide the Society Federal Reserve’s conduct of monetary policy: price stability and full employment, defined by the Act as four percent unemployment. While the central bank has diligently pursued the first goal, it has often given the second part of its mission short shrift. Indeed, past Fed policy- makers have publicly labeled four percent unemployment unobtainable for practical purposes. and Instead of their statutory mandate, these among various groups. But if the Federal central bankers sought guidance from the Reserve is committed to steering the so-called non-accelerating inflation rate economy above its presumed NAIRU, the of unemployment, or NAIRU. Proponents overall unemployment rate will not fall of the NAIRU doctrine claim that some below the central bank’s target level. fixed level of unemployment exists that This paper examines the logic of the will yield a stable rate of inflation. If the NAIRU doctrine and describes the process actual unemployment rate surpasses this through which the theory came to dominate level, they say, the inflation rate will thinking in the economics profession and decline. If unemployment drops below shape the conduct of monetary policy. The this level, inflation will increase. Most paper also chronicles the challenge that economic research over the last two de- America’s recent economic performance cades placed the NAIRU between 5.8 and poses for accepted estimates of the NAIRU 6.6 percent. and offers a set of general recommenda- The operating differences between a tions for Fed policymakers in the future.
    [Show full text]
  • Perceived Fomc: the Making of Hawks, Doves and Swingers
    NBER WORKING PAPER SERIES PERCEIVED FOMC: THE MAKING OF HAWKS, DOVES AND SWINGERS Michael D. Bordo Klodiana Istrefi Working Paper 24650 http://www.nber.org/papers/w24650 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 May 2018 The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2018 by Michael D. Bordo and Klodiana Istrefi. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Perceived FOMC: The Making of Hawks, Doves and Swingers Michael D. Bordo and Klodiana Istrefi NBER Working Paper No. 24650 May 2018 JEL No. E03,E50,E61 ABSTRACT Narrative records in US newspapers reveal that about 70 percent of Federal Open Market Committee (FOMC) members who served during the last 55 years are perceived to have had persistent policy preferences over time, as either inflation-fighting hawks or growth-promoting doves. The rest are perceived as swingers, switching between types, or remained an unknown quantity to markets. What makes a member a hawk or a dove? What moulds those who change their tune? We highlight ideology by education and early life economic experiences of members of the FOMC from 1960s to 2015. This research is based on an original dataset.
    [Show full text]