The Greenspan Era
THE GREENSPAN ERA
In October 1979, as Organization of Petroleum Exporting Countries (OPEC) was imposing adverse supply shocks on the world’s economies for the second time in a decade, Fed Chairman Paul Volcker decided that the time for action had come. Volcker had been appointed chairman by President Carter only two months earlier, and he had taken the job knowing that inflation had reached unacceptable levels. As guardian of the nation’s monetary system, he felt he had little choice but to pursue a policy of disinflation—a reduction in the rate of inflation. Since the Organization of Petroleum Exporting Countries (OPEC) inflation of the 1970s and the Volcker disinflation of the 1980s, the U.S. economy has experienced relatively mild fluctuations in inflation and unemployment. This period is called the Greenspan era, after Alan Greenspan who in 1987 followed Paul Volcker as chairman of the Federal Reserve. This period began with a favorable supply shock. In 1986, OPEC members started arguing over production levels, and their long-standing agreement to restrict supply broke down. Oil prices fell by about half. This favorable supply shock led to falling inflation and falling unemployment. Since then, the Fed has been careful to avoid repeating the policy mistakes of the 1960s, when excessive aggregate demand pushed unemployment below the natural rate and raised inflation. When unemployment fell and inflation rose in 1989 and 1990, the Fed raised interest rates and contracted aggregate demand, leading to a small recession in 1991. Unemployment then rose above most estimates of the natural rate, and inflation fell once again.
The rest of the 1990s witnessed a period of economic prosperity. Inflation gradually drifted downward, approaching zero by the end of the decade. Unemployment also drifted downward, leading many observers to believe that the natural rate of unemployment had fallen. Part of the credit for this good economic performance goes to Alan Greenspan
In October 1979, as Organization of Petroleum Exporting Countries (OPEC) was imposing adverse supply shocks on the world’s economies for the second time in a decade, Fed Chairman Paul Volcker decided that the time for action had come. Volcker had been appointed chairman by President Carter only two months earlier, and he had taken the job knowing that inflation had reached unacceptable levels. As guardian of the nation’s monetary system, he felt he had little choice but to pursue a policy of disinflation—a reduction in the rate of inflation. Since the Organization of Petroleum Exporting Countries (OPEC) inflation of the 1970s and the Volcker disinflation of the 1980s, the U.S. economy has experienced relatively mild fluctuations in inflation and unemployment. This period is called the Greenspan era, after Alan Greenspan who in 1987 followed Paul Volcker as chairman of the Federal Reserve. This period began with a favorable supply shock. In 1986, OPEC members started arguing over production levels, and their long-standing agreement to restrict supply broke down. Oil prices fell by about half. This favorable supply shock led to falling inflation and falling unemployment. Since then, the Fed has been careful to avoid repeating the policy mistakes of the 1960s, when excessive aggregate demand pushed unemployment below the natural rate and raised inflation. When unemployment fell and inflation rose in 1989 and 1990, the Fed raised interest rates and contracted aggregate demand, leading to a small recession in 1991. Unemployment then rose above most estimates of the natural rate, and inflation fell once again.
The rest of the 1990s witnessed a period of economic prosperity. Inflation gradually drifted downward, approaching zero by the end of the decade. Unemployment also drifted downward, leading many observers to believe that the natural rate of unemployment had fallen. Part of the credit for this good economic performance goes to Alan Greenspan