Inflation, Unemployment, and Monetary Policy (Alvin Hansen Symposium Series on Public Policy) PDF
Preview Inflation, Unemployment, and Monetary Policy (Alvin Hansen Symposium Series on Public Policy)
Page iii Inflation, Unemployment, and Monetary Policy Robert M. Solow and John B. Taylor The Alvin Hansen Symposium on Public Policy Harvard University edited and with an introduction by Benjamin M. Friedman The MIT Press Cambridge, Massachusetts London, England Page iv First MIT Press paperback edition, 1999 © 1998 Massachusetts Institute of Technology All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher. This book was set in Palatino by Achorn Graphic Services and was printed and bound in the United States of America. Library of Congress Cataloging-in-Publication Data Alvin Hansen Symposium on Public Policy (1st: 1995: Harvard University) Inflation, unemployment, and monetary policy / Robert M. Solow and John B. Taylor; edited and with an introduction by Benjamin M. Friedman. p. cm. Papers and discussion presented at the First Alvin Hansen Symposium on Public Policy, held at Harvard University on April 24, 1995. Includes bibliographical references and index. ISBN 0-262-19397-3 (hc : alk. paper), 0-262-69222-8 (pb) 1. Monetary policy—United States—Congresses. 2. Inflation (Finance)—United States—Congresses. 3. Unemployment—United States—Congresses. 4. Board of Governors of the Federal Reserve System (U.S.) I. Solow, Robert M. II. Taylor, John B. III. Title. HG540.A37 1995 332.4'973—dc21 97-14979 CIP Page v Contents Introduction vii Benjamin M. Friedman 1 How Cautious Must the Fed Be? 1 Robert M. Solow 2 Monetary Policy Guidelines for Employment and Inflation Stability 29 John B. Taylor 3 Comments 55 Benjamin M. Friedman James K. Galbraith N. Gregory Mankiw William Poole 4 Responses 89 Robert M. Solow John B. Taylor Page vi 5 Rejoinder 103 John B. Taylor Robert M. Solow Contributors 107 Notes 109 References 111 Index 115 Page vii Introduction Benjamin M. Friedman The connection between price inflation and real economic activity has been a central focus of interest to macroeconomists for much of the last century. It has likewise been a, if not the, central issue in the making of monetary policy. Moreover, opinion among both economists and policymakers has swung widely over the years on even the most basic questions concerning how economies actually behave in this regard, and therefore on just what monetary policy can and should do. As of today, practically everyone interested in the conduct of monetary policy acknowledges that central bank actions can and often do affect both inflation and measures of real economic activity like output, employment, and incomes. Modern macroeconomics has established familiar sets of conditions under which this would not be so—that is, conditions under which monetary policy would influence prices while leaving aggregate real activity unchanged—but to state these conditions and understand just how they would render monetary policy neutral in this sense is different from believing that they actually obtain in any known Page viii economy. As a result, the tension created by the joint effect of central bank actions on inflation and on aggregate output, or employment, is usually of the essence whenever public policy discussion turns to monetary policy. Merely to say that monetary policy affects both inflation and real economic outcomes, however, is to ignore the subtlety of the matter as well as to understate the difficulty of the resulting set of problems confronting monetary policymakers. The two-way interaction between monetary policy and economic behavior is a process that operates over time. Some consequences of central bank actions occur before others. Some are permanent, others only transitory. And some may be transitory yet sufficiently long-lasting that in the eyes of policymakers and the public (not to mention researchers who try to infer such distinctions on the basis of empirical evidence), for all practical purposes they might just as well be permanent. These complex and imperfectly understood dynamics present particular difficulties for monetary policymakers, whose responsibility it is in a democratic system to reflect public views of the public good. A key reason for the continual evolution of opinion on how policymakers should resolve these and other related tensions is the difficulty of establishing with any precision how the world that is relevant to monetary policymaking actually works. Macroeconomics is not a laboratory science. The basis for distinguishing among competing hypotheses is not replicated experimentation, but inference from limited actual experience that normally represents anything but a controlled experiment. Hence the same observed behavior of the economy—the same recessions, the same inflations, Page ix the same economic responses to not only central bank actions but also fiscal changes and asset price movements and exchange rate variations and oil price shocks and countless other events, all happening at once—is subject to sometimes widely differing interpretations. And, moreover, objective aspects of the economic environment also change. Even if economists at some time could give policymakers a satisfactorily accurate description of how specific central bank actions affected inflation and real activity, changes over time in the composition of industry, in the structure of the financial markets, in the economy's openness to flows of goods and assets, in government regulation, and in everyday business practice would soon render that description out of date. The papers presented by Robert Solow and John Taylor at the first Alvin Hansen Symposium on Public Policy address the practical dilemma currently confronting American monetary policy. Inflation has slowed from the rapid pace that aroused such intense public dismay a decade and a half ago. Economic expansion since the last recession ended has been persistent though hardly vigorous. Both employment and unemployment have reached levels that in the past have often caused prices to accelerate. In these circumstances policymakers face opportunities as well as risks, and the uncertainties—not only on specifics but also about more fundamental aspects of how the economy behaves and how monetary policy affects that behavior—are, as always, large. How, then, should the Federal Reserve System proceed? The objective of these papers and the discussion that follows is to make a practical contribution to resolving this important public policy question. Page x Acknowledgments The papers and discussion published here were presented at the first Alvin Hansen Symposium on Public Policy, held at Harvard University on April 24, 1995. In introducing these proceedings, I want to express my very sincere personal thanks, as well as the gratitude of the Harvard Economics Department, to Marian Hansen Merrifield and Leroy Sorenson Merrifield. Their generosity has made possible not only this first Alvin Hansen Symposium but also the entire series of public policy symposia that the Economics Department will now sponsor at Harvard in Alvin Hansen's name. I have enjoyed enormously working with Marian and Leroy throughout the process of establishing this symposium series. I admire both their generosity and their sense of public purpose. Numerous former students of Alvin Hansen also contributed to making this symposium series possible, and on behalf of the Harvard Economics Department I thank them as well. Their eager participation in this effort stands as testimony to the profound and positive effect that Professor Hansen had on so many younger economists. I am also grateful to James Duesenberry and Richard Musgrave, who served with me on the organizing committee that established the Alvin Hansen Symposium series and then arranged the content of this first symposium; to Helen Deas, who did a prodigious amount of work in arranging the symposium's logistics; to Terry Vaughn of the MIT Press, for his support in bringing these proceedings to publication; and especially to Robert Solow and John Taylor, as Page xi well as my three fellow discussants, for contributing their papers and comments. In 1967 Alvin Hansen, then in his 80th year, received the American Economic Association's Francis E. Walker medal. James Tobin, in presenting this award, described him as follows: Alvin H. Hansen, a gentle revolutionary who has lived to see his cause triumphant and his heresies orthodox, an untiring scholar whose example and influence have fruitfully changed the directions of his science, a political economist who has reformed policies and institutions in his own country and elsewhere without any power save the force of his ideas. From his boyhood on the South Dakota prairie, Alvin Hansen has believed that knowledge can improve the condition of man. In the integrity of that faith he has had the courage never to close his mind and to seek and speak the truth wherever it might lead. But Professor Hansen is to be honored with as much affection as respect. Generation after generation, students have left his seminar and his study not only enlightened but also inspired—inspired with some of his enthusiastic conviction that economics is a science for the service of mankind.
Description:The list of books you might like
