Notes on "Understanding the Greenspan" by Standard Alan S, Blinder & Ricardo Reis

Understanding the Greenspan Standard

Alan S, Blinder & Ricardo Reis

Princeton University Sept 12. 2005

For years now, U.S. monetary policy has been said to be on “the Greenspan Standard”

The monetary policy of the Greenspan era are described by a Taylor rule. But any Taylor rule needs to be interpreted as an econometric allegory of “historically anerage responses” to inflation and unemployment

the Greenspan Standard is highly situational, even opportunistic.

FOMC decisions are made one meeting at a time, without pre-commitment to any future course of action and often with much indication as to what those future actions might be.

Monetary policy under Greenspan has been remarkably flexible and adaptable to changing circumstances.

Greenspan had never accepted the idea that any model without unchanging coefficients, or even with an unchanging structure, can describe the US economy adequately.

Greenspan has suggested a different methodological paradigim for monetary policy- that of aik manage.

The many sources of risk and uncertainty that policymakers face, quantify those risks when possible, and assessing the costs associated with each of the risks. The central summary tool in such a risk-management system is often a risk matrix that, according to criteria set forth in the Fed’s manual for bank supervisors should be used to identify significant actinvities, the type and level of inherent risks in these activities, and the adequacy of risk management over these activities, as well as to determine composite-risk assessment.

Criticism:

Failure in financial regulation, including the Federal Reserve’s failure “to stern the tide of toxic mortgages “.

Breakdown in corporate governance that led to “reckless” actions and excessive risk taking by financial institutions.

Households taking on too much debt.

A lack of understanding of the financial system on the part of policymakers.

Fundamental breaches in accountability and ethics “at all levels”.

Greenspan claims that his model is reasonable and better than most models but he fails to see the behavior of the bankers.