The Evolution of Economic Understanding and Postwar Stabilization Policy
AbstractThere have been large changes in the conduct of aggregate demand policy in the United States over the past fifty years. This paper shows that these changes in policy have resulted largely from changes in policymakers' beliefs about the functioning of the economy and the effects of policy. We document the changes in beliefs using contemporaneous discussions of the economy and policy by monetary and fiscal policymakers and, for the period since the late 1960s, using the Federal Reserve's internal forecasts. We find that policymakers' understanding of the economy has not exhibited steady improvement. Instead, the evidence reveals an evolution from a fairly crude but basically sound worldview in the 1950s, to a more sophisticated but deeply flawed model in the 1960s, to uncertainty and fluctuating beliefs in the 1970s, and finally to the modern worldview of the 1980s and 1990s. We establish a link between policymakers' beliefs and aggregate demand policy by examining narrative evidence on the motivation for key policy choices. We also compare monetary policymakers' choices with the implications of a modern estimated policy rule and show that the main differences are consistent with the changes in beliefs that we observe.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9274.
Date of creation: Oct 2002
Date of revision:
Note: DAE EFG ME
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Other versions of this item:
- Christina D. Romer & David H. Romer, 2002. "The evolution of economic understanding and postwar stabilization policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 11-78.
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
This paper has been announced in the following NEP Reports:
- NEP-HPE-2002-10-18 (History & Philosophy of Economics)
- NEP-LAM-2002-09-21 (Central & South America)
- NEP-PKE-2002-10-18 (Post Keynesian Economics)
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