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How Does the FOMC Learn About Economic Revolutions? Evidence from the New Economy Era, 1994–2001

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  • Richard G Anderson
  • Kevin L Kliesen

Abstract

Forecasting is a daunting challenge for business economists and policymakers, often made more difficult by pervasive uncertainty. One such uncertainty is the reaction of policymakers to major shifts in the economy. We explore the process by which the Federal Reserve Open Market Committee (FOMC) came to recognize and react to the productivity acceleration of the 1990s. Initial impressions were formed importantly by anecdotal evidence. Then, FOMC members—and chiefly Federal Reserve Board Chairman Alan Greenspan—came to mistrust the data and the forecasts. Eventually, revisions to published data confirmed initial impressions. Our main conclusion is that the productivity-driven positive supply side shocks of the 1990s were initially viewed favorably. However, over time they came to be viewed as posing a threat to the economy, chiefly through unsustainable increases in aggregate demand growth that threatened to increase inflation pressures. Perhaps nothing so complicates business planning and forecasting as policymakers who initially embrace an unanticipated shift and later come to abhor the same shift.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Business Economics.

Volume (Year): 47 (2012)
Issue (Month): 1 (January)
Pages: 27-56

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Handle: RePEc:pal:buseco:v:47:y:2012:i:1:p:27-56

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