Landing the reverse Greenspan.

• Author: Posen, Adam S.
• Position: The Monetary Realist - Alan Greenspan

Central bankers should be evaluated much like Olympic gymnasts, figure skaters, and platform divers--that is, they should get marks for landing their policy moves properly and for technical proficiency, but also for the degree of difficulty in execution. Unlike the controlled environments under which these athletes compete, however, central bankers are exposed to a host of political and economic winds as well as a great deal of uncertainty about underlying conditions. To earn a gold medal in monetary policymaking, the central banker has to compensate for these factors and still land the economy where the public expects it.

By common assent, Alan Greenspan's performance that earned a perfect score was his success in getting the Fed to hold off raising interest rates when U.S. productivity and investment surged in 1995-97. Them was no question in theory that a sustained productivity improvement would mean the economy could grow faster without generating inflation-the brilliance of the move began with Greenspan's early recognition that there was a rise in the U.S. productivity trend in reality, a feat of technical mastery.

Adding to the degree of difficulty were the risk involved of inflation rising, the possibility of his productivity forecast being incorrect or even just slow to pan out, and the understandable reluctance of many members of the FOMC to hold back from tightening policy when standard macroeconomic indicators suggested they should. Yet Greenspan pulled off the policy move politically and economically, and the American economy landed gracefully with higher growth rates and lower inflation.

All central banks have since added "the Flying Greenspan" jump holding off interest rate increases in response to forecast improvements in potential growth--to their practice repertoire, but only a handful have been brave enough to attempt it m competition. The cleanest example was probably the Bank of England's decision in the early 2000s to take seriously the inflow of low-wage workers from eastern Europe as a damper on wage inflation and let the British expansion extend as a result.

Both the European Central Bank and the Bank of Japan are currently facing possible opportunities to execute their own versions of the move, depending upon their risk tolerance for inflation and their assessments of their economies" underlying growth trends. What these central banks share is a common emphasis on the technical proficiency aspect of the maneuver...