Growth in the 1990s

A recent working paper from Matthew Shapiro and Yuriy Gorodnichenko researches the Fed’s role in the US economy’s growth in the 1990s.

The paper’s most visible message is something that the institutional economics web log has discussed for a while. What Shapiro and Gorodnichenko find is that

Our results suggest that PLT (Price-Level Targeting), either strict or partial, could account for the performance of output and inflation when Alan Greenspan shifted to an optimistic outlook for long-run growth.

…

In summary, we find that PLT can not only match the stylized facts of the late 1990s, but also that undoing past policy mistakes as under PLT is generally a better policy regime than letting bygones be bygones as under IT (Inflation Targeting).

For anyone who argues in absolute terms for inflation targeting, this paper puts a little perspective on both types of monetary regimes. And in respect to Alan Greenspan, the growth of the 90s and the monetary policy that went with it was not a fluke, as the Fed noticed that the economy itself had expanded its “productive capacity.”