NCPA - National Center for Policy Analysis

1990s Witnessed Greater Economic Stability and Less Volatility

May 16, 2002

To what degree were the monetary policies of Federal Reserve Chairman Alan Greenspan responsible for the unprecedented levels of growth and a remarkable performance in the 1990s? Economist Gregory Mankiw applauds those policies, but argues they need to be placed in a larger context.

To begin with, Mankiw points out that the low inflation rate of the last decade -- a dramatic change from the 1970s and 1980s -- was not unique. The 1950s and 1960s were also marked by very low inflation rates.

  • However, the 1990s inflation rate was much steadier; it was a third less volatile than in the 1980s and a quarter less volatile than in the 1960s.
  • There was also a concurrent stability in both economic growth and joblessness during the 1990s; it was far less volatile than in any recent decade.
  • Another important factor was the smooth advance in technology (the "New Economy") throughout the decade, which might help explain the low volatility in other macroeconomic variables.
  • Also fortuitous was the behavior of the stock market, where high returns and low volatility made the 1990s essentially the best time ever to be investing in Wall Street.

Thus, the macroeconomic success of the 1990s was attributable at least in part to very good luck. However, Mankiw sees cause for concern, because the Greenspan policy has never been fully explained, although some economists think that, without announcing a formal target, the Fed covertly attempted to keep the rate of price inflation below about 3 percent.

Source: Matt Nesvisky, "U.S. Monetary Policy During the 1990s," NBER Digest, December 2001; based on N. Gregory Mankiw, "U.S. Monetary Policy in the 1990s," NBER Working Paper No. 8471, September 2001, National Bureau of Economic Research.

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