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A Comparison of Five Federal Reserve Chairmen: Was Greenspan the Best?

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Author Info
Ray C. Fair () (Cowles Foundation, Yale University)

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Abstract

This paper examines the performances of the past five Federal Reserve chairmen using optimal control techniques and a macroeconometric model. Each chairman is evaluated in two ways. The first way is comparing the actual performance of the economy under his term relative to what the performance would have been had he behaved optimally. Comparing chairmen only on the basis of the actual performance of the economy is not appropriate because it does not control for different exogenous-variable values and shocks that the Fed has no control over. This comparison is done for a wide range of loss functions. It does not assume that the chairman necessarily behaved by minimizing a loss function; it just compares his actual behavior to what he could have done had he minimized a particular loss function. The second way, on the other hand, assumes that each chairman minimized a loss function, and it chooses for each chairman which of the various loss functions tried comes closest to matching the actual values of the control variable to the optimal values. A summary evaluation of each chairman is presented in Section 6.

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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1577.

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Length: 36 pages
Date of creation: Sep 2006
Date of revision: Mar 2007
Publication status: Published in The B.E. Journal of Macroeconomics, Vol. 1, Issue 1 (Contributions), Article 12
Handle: RePEc:cwl:cwldpp:1577

Note: CFP 1213
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Related research
Keywords: Fed chairmen; Optimal control; Economic performance;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    Other versions:
  2. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
    Other versions:
  3. Ray C. Fair, 2006. "Evaluating Inflation Targeting Using a Macroeconometric Model," Levine's Bibliography 321307000000000303, UCLA Department of Economics. [Downloadable!]
    Other versions:
  4. Christina D. Romer & David H. Romer, 2003. "Choosing the Federal Reserve Chair: Lessons from History," NBER Working Papers 10161, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. James H. Stock & Mark W. Watson, 2003. "Has the business cycle changed?," Proceedings, Federal Reserve Bank of Kansas City, pages 9-56. [Downloadable!]
  6. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January. [Downloadable!] (restricted)
  7. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2007. "On the Fit of New Keynesian Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 123-143, April. [Downloadable!] (restricted)
  8. Ray C. Fair, 2002. "On Modeling the Effects of Inflation Shocks," The B.E. Journal of Macroeconomics, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
  9. Rudd, Jeremy & Whelan, Karl, 2005. "New tests of the new-Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1167-1181, September. [Downloadable!] (restricted)
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  10. Alan S. Blinder & Ricardo Reis, 2005. "Understanding the Greenspan Standard," Working Papers 88, Princeton University, Department of Economics, Center for Economic Policy Studies.. [Downloadable!]
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  11. Evans, George W. & Ramey, Garey, 2006. "Adaptive expectations, underparameterization and the Lucas critique," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 249-264, March. [Downloadable!] (restricted)
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  12. Fair, Ray C, 1978. "The Use of Optimal Control Techniques to Measure Economic Performance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 19(2), pages 289-309, June. [Downloadable!] (restricted)
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  13. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(2001-1), pages 135-174. [Downloadable!]
  14. Fuhrer, Jeffrey C. & Rudebusch, Glenn D., 2004. "Estimating the Euler equation for output," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1133-1153, September. [Downloadable!] (restricted)
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  15. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond. [Downloadable!]
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  16. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September. [Downloadable!] (restricted)
  17. Ray C. Fair, 2001. "On Modeling the Effects of Inflation Shocks," Cowles Foundation Discussion Papers 1300, Cowles Foundation, Yale University, revised Mar 2002. [Downloadable!]
  18. Ray C. Fair, 2000. "Testing the NAIRU Model for the United States," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 64-71, February. [Downloadable!] (restricted)
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