Frederic Mishkin studied the elements of monetary policy that made Alan Greenspan’s tenure as chairman of the Federal Reserve so successful. Three elements stand out: a strong commitment to the nominal anchor of price stability; a combination of long-run and preventive policies on inflation; and more transparency about the Fed’s actions. The result has been an outstanding period of low and stable inflation that contributed greatly to economic growth. Greenspan’s stellar record gave him tremendous leeway to undertake these strategies and, as conditions change, adjust them as he sees fit.
Greenspan’s successor will not start out with the same degree of trust and will need help in resisting pressure from lawmakers and the public to take actions that seem better in the short run but hurt the economy in the longer run. Mishkin recommends that the Fed adopt as explicit policy the key implicit elements of Greenspan’s strategy.
First, the Fed should announce a long-run target for inflation. Second, the Fed should explain clearly how such a target is the best way to fulfill over time both sides of its official mandate: high employment and stable prices. Third, the Fed should declare that it will take a full range of measures in the face of future unforeseen inflation shocks to bring the economy back toward its long-run target. Fourth, the Fed should be wary of pushing transparency too far and should drop its effective announcement of the path of future policy rate changes, as the public is less likely to understand deviations from this path when there are policy adjustments as circumstances change.