More evidence which supports a yes answer to the question “Has the Fed Been a Failure?” (Cato Institute Working Paper No. 2 (December).
Thomas L. Hogan writing on the Sound Money Project blog highlights his forthcoming paper in the Journal of Macroeconomics, “Has the Fed Improved U.S. Economic Performance?.” The abstract:
This paper finds that U.S. economic performance has not generally improved under the Federal Reserve, with the possible exception of the Great Moderation. We analyze the Fed and pre-Fed periods in terms of the rates and volatilities of inflation and real GDP growth. Comparing the pre-Fed periods to the post-World War II period and the Great Moderation, we find that real GDP growth has been lower under the Fed, while inflation has been higher. The volatilities of inflation and GDP growth have both declined under the Fed, but the reductions occurred mostly during the Great Moderation.
Hogan argues the study has two important conclusions:
First, any improvements[Fed era compared to pre Fed era] in economic performance appear to have come mostly during the Great Moderation rather than the post-World War II period.
Second, other studies finding the Fed has reduced GDP volatility look only at the national banking period after the Civil War. The low GDP volatility in the state banking period indicates that those comparisons are biased or, at best, incomplete.
Hogan further argues:
Given these results, those who favor the Fed might argue that the Great Moderation is more indicative of current Fed policy. However, there is still much debate over how large a role monetary policy played in creating the Great Moderation relative to other causes like improvements in information technology and inventory management and the lack of real shocks from oil prices or major wars. Economists also disagree over what policy the Fed should follow in terms of targeting inflation, nominal GDP, or a dual mandate like the Taylor Rule.
I have agreed elsewhere that the early period of the Great Moderation was an apparent improvement in policy compared to the policies that brought us the stagflation of the 1970s, but with significant caveats. While the Great Moderation perhaps indicates a rules based policy is, if one has a central bank, superior to policy discretion, the proposed rule alternatives do not eliminate Fed generated boom-bust cycles. The Great Moderation ended with back to back boom-busts which have brought us to the current mondustrial policy and the resulting stagnation with renewed threats of another bust on the horizon.
The only real long run solution is institutional reform that would support a bottom up movement to competition in currencies and eventually a market determined sound money.
HT to Alex Salter
