Federal REVIEWReserve Bank of St. Louis MARCH/APRIL 2005 VOLUME 87, NUMBER 2, PART 2 R EVIEW Reflections on Monetary Policy 25 Years After October 1979 Proceedings of a Special Conference of the Federal Reserve Bank of St. Louis Origins of the Great Inflation Allan H. Meltzer MAR The Reform of October 1979: How It Happened and Why CH David E. Lindsey, Athanasios Orphanides, and Robert H. Rasche / APRIL The Monetary Policy Debate Since October 1979: Lessons for Theory and Practice 2005 • Marvin Goodfriend V The International Implications of October 1979: OL Toward a Long Boom on a Global Scale UME John B. Taylor 87, Panel Discussion I: What Have We Learned Since October 1979? N Ben S. Bernanke, Alan S. Blinder, and Bennett T. McCallum UMBER Panel Discussion II: Safeguarding Good Policy Practice Roger W. Ferguson Jr., Charles A.E. Goodhart, and William Poole 2, P AR Commentaries and Reflections T 2 Reflections on Monetary Policy REVIEW 25 Years After October 1979 137 Chairman’s Remarks Director of Research Alan Greenspan Robert H. Rasche Deputy Director of Research 139 Editors’ Introduction Cletus C. Coughlin Athanasios Orphanides Review Editor and Daniel L. Thornton William T. Gavin Research Economists 145 Origins of the Great Inflation Richard G. Anderson Allan H. Meltzer James B. Bullard Commentary Riccardo DiCecio 177 Michael J. Dueker Christina D. Romer Thomas A. Garrett Massimo Guidolin 187 The Reform of October 1979: Hui Guo Rubén Hernández-Murillo How It Happened and Why Kevin L. Kliesen David E. Lindsey, Athanasios Orphanides, Christopher J. Neely and Robert H. Rasche Edward Nelson 237 Commentary Michael T. Owyang Michael R. Pakko Stephen H. Axilrod Anthony N.M. Pennington-Cross Jeremy M. Piger 243 The Monetary Policy Debate Patricia S. Pollard Since October 1979: Daniel L. Thornton Howard J. Wall Lessons for Theory and Practice Christopher H. Wheeler Marvin Goodfriend David C. Wheelock 263 Commentary Managing Editor Laurence M. Ball George E. Fortier Assistant Editor 269 The International Implications Lydia H. Johnson of October 1979: Graphic Designer Toward a Long Boom Donna M. Stiller on a Global Scale The views expressed are those of the individual authors and do not necessarily reflect official positions of the John B. Taylor Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. 277 Panel Discussion I: What Have We Learned Since October 1979? Ben S. Bernanke, Alan S. Blinder, and Bennett T. McCallum FEDERAL RESERVE BANK OF ST. LOUIS REVIEW MARCH/APRIL, PART 2 2005 i 293 Panel Discussion II: 317 Charles Freedman Safeguarding Good Policy Practice Roger W. Ferguson Jr., Charles A.E. Goodhart, 323 Benjamin M. Friedman and William Poole Reflections 329 Otmar Issing The following reflections for this conference issue, which appear without editorial changes to content, 337 Georg Rich are essays and historical overviews, as well as personal accounts written by policymakers and Federal Reserve officials who were in office around the time of the 343 Frederick H. Schultz October 6, 1979, monetary policy action. 307 Robert P. Black 349 Anna J. Schwartz 311 Philip E. Coldwell 353 Edwin M. Truman 313 Joseph R. Coyne Review is published six times per year by the Research Division of the Federal Reserve Bank of St. Louis and may be accessed through our web site: research.stlouisfed.org/publications/review. All non- proprietary and nonconfidential data and programs for the articles written by Federal Reserve Bank of St. Louis staff and published in Review are available to our readers on this web site. 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Please send a copy of any reprinted, published, or displayed materials to George Fortier, Research Division, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166-0442; [email protected]. Please note: Abstracts, synopses, and other derivative works may be made only with prior written permission of the Federal Reserve Bank of St. Louis. Please contact the Research Division at the above address to request permission. Review is indexed and/or abstracted in Social Sciences Citation Index, Social Scisearch, Current Contents/ Social and Behavioral Sciences, ABI/Inform Global, Business and Company Resource Center, Business Source Elite, Business Source Premier, EconLit, Expanded Academic ASAP, General BusinessFile ASAP, Wilson Business Full Text, and Wilson Select Full Text. © 2005, Federal Reserve Bank of St. Louis. ISSN 0014-9187 ii MARCH/APRIL, PART 2 2005 FEDERAL RESERVE BANK OF ST. LOUIS REVIEW Charles Freedman Contributing Authors 1757 Dunkirk Cres. Ottawa, ON K1H 5T3 Canada Stephen H. Axilrod 106 East 85th Street [email protected] Apartment 7N New York, NY 10028 Benjamin M. Friedman Department of Economics Littauer Center Laurence M. Ball Harvard University Department of Economics Cambridge, MA 02138 The John Hopkins University Baltimore, MD 21218 [email protected] Marvin Goodfriend Federal Reserve Bank of Richmond P.O. Box 27622 Ben S. Bernanke Richmond, VA 23261 Board of Governors of the Federal Reserve [email protected] System 20th Street and Constitution, NW Charles A.E. Goodhart Washington, DC 20551 London School of Economics [email protected] Houghton Street London, WC2A 2AE Robert P. Black England 10 Dahlgren Road [email protected] Richmond, VA 23238-6104 Alan Greenspan Alan S. Blinder Board of Governors of the Federal Reserve 105 Fisher Hall System Department of Economics 20th Street and Constitution, NW Princeton University Washington, DC 20551 Princeton, NJ 08544 [email protected] Otmar Issing Executive Board of the European Central Bank Kaiserstr. 29 Philip E. Coldwell 3330 Southwestern Blvd. 60311 Frankfurt am Main Dallas, TX 75225 Germany [email protected] Joseph R. Coyne David E. Lindsey 4833 Western Avenue, NW 13017 Triple Crown Loop Washington, DC 20016 Gainesville, VA 20155 [email protected] Roger W. Ferguson Jr. Board of Governors of the Federal Reserve Bennett T. McCallum System Graduate School of Industrial Administration 20th Street and Constitution, NW Carnegie Mellon University Washington, DC 20551 Pittsburgh, PA 15213 [email protected] [email protected] FEDERAL RESERVE BANK OF ST. LOUIS REVIEW MARCH/APRIL, PART 2 2005 iii Allan H. Meltzer Christina D. Romer Tepper School of Business Department of Economics Carnegie Mellon University University of California, Berkeley Pittsburgh, PA 15213 Berkeley, CA 94720-3880 [email protected] [email protected] Athanasios Orphanides Frederick H. Schultz Board of Governors of the Federal Reserve P.O. Box 1200 System Jacksonville, FL 32201 20th Street and Constitution, NW Washington, DC 20551 Anna J. Schwartz [email protected] National Bureau of Economic Research 365 Fifth Avenure, Suite 5318, 5th Floor William Poole New York, NY 10016-4309 Federal Reserve Bank of St. Louis [email protected] P.O. Box 442 St. Louis, MO 63166 John B. Taylor [email protected] Department of the Treasury 1500 Pennsylvania Avenue, NW—Room 4448 Robert H. Rasche Washington, DC 20220 Federal Reserve Bank of St. Louis [email protected] P.O. Box 442 St. Louis, MO 63166 Edwin M. Truman [email protected] Institute for International Economics 1750 Massachusetts Avenue, NW Georg Rich Washington, DC 20036-1903 Parkweg 7 [email protected] CH-5000 Aarau Switzerland [email protected] iv MARCH/APRIL, PART 2 2005 FEDERAL RESERVE BANK OF ST. LOUIS REVIEW Chairman’s Remarks Alan Greenspan defining moment may shape the But the importance of price stability has some- direction of an institution for decades times been insufficiently appreciated in our to come. In the modern history of the central bank’s history, and, as Allan Meltzer will Federal Reserve, the action it took on soon point out, such episodes have had unfortu- AOctober 6, 1979, stands out as such a milestone nate consequences. and arguably as a turning point in our nation’s Far from being a bulwark of stability in the economic history. The policy change initiated 1970s, the Federal Reserve conducted policies under the leadership of Chairman Paul Volcker that, in the judgment of many analysts, inadver- on that Saturday morning in Washington rescued tently contributed to an environment of macro- our nation’s economy from a dangerous path of economic instability. We should strive to retain ever-escalating inflation and instability. As I in the collective memory of our institution the noted in congressional testimony before the ensuing lessons of that period. It may be the most Joint Economic Committee on November 5 of fruitful and proper way to commemorate the that year, events of October a quarter-century ago. Tracing the roots of the 1970s inflation brings We are here…to evaluate the moves of us to an earlier era. The Keynesian revolution of Chairman Volcker and his colleagues last the 1930s and its subsequent empirical applica- month, implying that some alternate poli- tion led many economists to accept the view that cies were feasible at that time.