During Alan Greenspan’s years at the helm of the Federal Reserve System, the global economy has undergone significant structural change and withstood a variety of financial and economic shocks. In addition to helping steer the global economy through such challenges, Chairman Greenspan has been at the center of discussions on monetary policy ideas and issues. To honor Alan Greenspan’s service, the Federal Reserve Bank of Kansas City sponsored an economic symposium to explore several of these ideas and issues that will continue to challenge central bankers for years to come. The symposium was held at Jackson Hole, Wyoming, August 25-27. Kahn highlights the principal issues raised at the symposium, which brought together a distinguished group of central bank officials and academic, policy, and business economists to discuss these important challenges and identify lessons for the future.Greenspan, Alan ; Monetary policy ; Banks and banking, Central

George A. Kahn

English

Research Papers in Economics

The Greenspan Era:
Lessons for the Future— 
A Summary of the Bank’s 2005
Economic Symposium
By George A. Kahn
D
uring Alan Greenspan’s years at the helm of the Federal Reserve
System, the global economy has undergone significant struc-
tural change and withstood a variety of financial and economic
shocks. In addition to helping steer the global economy through such
challenges, Chairman Greenspan has been at the center of discussions
on monetary policy ideas and issues. 
To honor Alan Greenspan’s service, the Federal Reserve Bank of
Kansas City sponsored an economic symposium to explore several of
these ideas and issues that will continue to challenge central bankers for
years to come. The symposium brought together a distinguished group
of central bank officials and academic, policy, and business economists
to discuss these important challenges and identify lessons for the future.
The Greenspan legacy
The symposium began with a look back at the issues, events, and
ideas that defined the Greenspan era. Conference participants were uni-
versal in their praise for the manner in which Greenspan steered the
George A. Kahn is vice president and associate director of research at the Federal
Reserve Bank of Kansas City. This article is on the bank’s website at
www.kansascityfed.org.
3536 FEDERAL RESERVE BANK OF KANSAS CITY
THE GREENSPAN ERA: LESSONS FOR THE FUTURE
A Symposium Sponsored by the Federal Reserve Bank 
of Kansas City
August 25-27, 2005
SESSION I
Chair
ROGER W. FERGUSON, JR. – Vice Chairman, 
Board of Governors of the Federal Reserve System
Reflections on Central Banking
ALAN GREENSPAN – Chairman, 
Board of Governors of the Federal Reserve System
Economic Performance in the Greenspan Era: 
The Evolution of Events and Ideas
ALAN S. BLINDER – Professor, Princeton University
RICARDO REIS – Professor, Princeton University
Discussants
ALLAN H. MELTZER – Professor, 
Carnegie-Mellon University
JOHN B. TAYLOR – Professor, Stanford University 
and Senior Fellow, Hoover Institution
Business Cycle Dynamics and Monetary Policy
ROBERT E. HALL – Professor, Stanford University
 ECONOMIC REVIEW • FOURTH QUARTER 2005 37
Discussants
CHARLES BEAN – Executive Director and 
Chief Economist, Bank of England
N. GREGORY MANKIW – Professor, Harvard University
Current Account Imbalances: How Will They End?
SEBASTIAN EDWARDS – Professor, University of 
California, Los Angeles
Discussants
BARRY EICHENGREEN – Professor, University of 
California, Berkeley
CATHERINE L. MANN – Senior Fellow, Institute for
International Economics
Luncheon Address
ROBERT E. RUBIN – Director, Citigroup
SESSION II
Chair
MALCOLM D. KNIGHT – General Manager,
Bank for International Settlements
Financial Markets, Financial Fragility, 
and Central Banking
RAGHURAM G. RAJAN – Economic Counsellor 
and Director of Research, International Monetary Fund
 38 FEDERAL RESERVE BANK OF KANSAS CITY
Discussants
DONALD L. KOHN – Governor, Board of Governors 
of the Federal Reserve System
HYUN SONG SHIN – Professor, London School 
of Economics
Central Bank Transparency 
and Communications Policy
MICHAEL WOODFORD – Professor, Columbia University
Discussant
TIFF MACKLEM – Deputy Governor, Bank of Canada
Monetary Policy Strategies: A Central Bank Panel
KAZUMASA IWATA – Deputy Governor, Bank of Japan
MERVYN A. KING – Governor, Bank of England
JEAN-CLAUDE TRICHET – President, European 
Central BankECONOMIC REVIEW • FOURTH QUARTER 2005 39
Federal Reserve System during his tenure as chairman. Despite a
number of economic shocks—including the 1987 stock market col-
lapse, the savings and loan crisis of the 1980s and early 1990s, the
Mexican peso crisis, the Asian financial crisis, the Russian debt default,
the bursting of the high-tech stock market bubble, and the 9/11 terror-
ist attacks—the U.S. economy experienced sustained economic growth
interrupted by only two mild recessions. Over the same period, infla-
tion fell gradually from roughly 4 percent to 2 percent—a level many
would associate with price stability. 
If participants were looking for a simple formula that explained the
success of the Greenspan Fed, they were disappointed. Greenspan’s
approach to monetary policy was described as discretionary, flexible,
and based on a deep understanding of economic data and business con-
ditions. The Greenspan approach was also said to reject reliance on a
single model of the economy with fixed economic relationships and
parameters. In a dynamic economic environment with rapid technolog-
ical change, financial deregulation and innovation, and increasing
globalization, key economic relationships are constantly changing, ren-
dering empirical models—that are based on the past—obsolete. There
is no substitute for listening to a wide range of business and financial
market contacts and using judgment in the conduct of monetary policy. 
That is not to say there were no guiding principles for conducting
monetary policy during the Greenspan era. In fact, one presentation
identified eleven such principles (Blinder and Reis). One key principle
that everyone agreed guided monetary policy in the Greenspan era—
one so obvious that it was not included in the list of eleven
principles—was the idea that achieving and maintaining price stability
was central to attaining maximum sustainable growth. Another hall-
mark of the Greenspan era was reliance on what he himself has
characterized as a “risk-management” approach to monetary policy.
Under this approach, policymakers guard against low probability out-
comes that might have outsized adverse effects on the economy. An
example of the risk-management approach occurred in 2002-03 when
the Federal Reserve eased monetary policy to prevent the unlikely, but
potentially very costly, emergence of deflation.
 40 FEDERAL RESERVE BANK OF KANSAS CITY
There was considerable discussion about whether a risk-manage-
ment approach was really that different from a flexible application of a
policy rule, or from the use of a rule as a check on policymakers’ judg-
ment. A policy rule is a formula that policymakers can use to
systematically set their policy instrument in response to economic con-
ditions. Conference participants disagreed about the extent to which
monetary policy in the Greenspan era could be characterized by a
simple rule. 
Some participants questioned the future reliability of rules based on
unobservable variables that are not well defined (Hall). Typically, policy
rules that have been advocated in the academic literature require esti-
mates of the “neutral interest rate,” the “natural rate of unemployment,”
or the “potential level of GDP.”  These “equilibrium” concepts are based
on the idea that the business cycle can be separated from longer-run
trend movements in the economy. But, increasingly, macroeconomists
are questioning the view that the business cycle can be measured as a
temporary departure from trend. An implication is that policymakers
should rely only on rules with observable variables, and that the key
variable should be inflation. 
Challenges for the future
After reviewing the events and ideas associated with the Greenspan
era, the discussion turned to challenges for the future. Three economic
developments occurred during the Greenspan era that will continue to
challenge policymakers in the years ahead. First, the U.S. current
account has moved from relative balance to a record deficit. Second,
financial market innovation and deregulation have distributed risk
more broadly but potentially led to excessive risk taking by financial
intermediaries. And third, asset price movements have become more
important sources of economic fluctuations.
In the view of many symposium participants, the return to current
account balance in the United States could be painful. Large current
account deficits have been financed with capital inflows—much of
which have come in the form of foreign central bank purchases of gov-
ernment securities. If this flow of capital were to stop suddenly, the
dollar could depreciate and inflationary pressures might build. This
 ECONOMIC REVIEW • FOURTH QUARTER 2005 41
could lead the Federal Reserve to raise short-term interest rates which,
in turn, could slow economic growth in the United States and possibly
the rest of the world.  
While there are no modern historical precedents for a large country
such as the United States running very large and persistent current
account deficits, there are numerous examples of current account rever-
sals among smaller countries in both the industrial and developing
world. And the experience of these countries—to the extent it is rele-
vant—does not bode well for the United States. Previous episodes of
current account rebalancing in both industrial and developing countries
have been associated with a depreciation of the exchange rate and a
temporary reduction in real GDP growth. Effects on inflation and
interest rates have varied depending on the size of the country and
whether it is industrialized (Edwards). 
While the current account imbalance appears quite large, some par-
ticipants thought a more orderly and less painful adjustment was
possible. For example, with gradual and simultaneous adjustments in
savings and investment in the United States and the rest of the world—
and in the associated exchange rate movements—the required rebalanc-
ing of the current account need not be disruptive (Crockett). One key
to an orderly adjustment process is for policymakers to resist protec-
tionist trade measures and work toward further trade liberalization
(Krueger, Redrado).       
Another challenge facing policymakers is maintaining financial stabil-
ity in a deregulated global economy with ongoing financial innovation. A
driving force of financial innovation is technological progress, which has
altered many aspects of financial transactions and spurred deregulation
and institutional change (Rajan). Participants agreed that maintaining
financial stability was an important policy objective but disagreed about
whether financial markets had become riskier and about whether new
forms of regulation were desirable. 
While it was generally agreed that financial developments had
allowed for greater diversification of risk, there was concern that finan-
cial intermediaries’ size and appetite for risk could increase over the
cycle. The increased ability of economies to bear risk might lead to
greater risk-taking behavior. Financial institutions might act in ways
that exacerbated real economic fluctuations, and, through their collec-
 42 FEDERAL RESERVE BANK OF KANSAS CITY
tive and sometimes herd-like behavior, increase the likelihood of realiz-
ing what would otherwise have been low-probability risks. To those
concerned with excessive risk taking, “a risk-management approach to
financial regulation [would] help stave off such states through the judi-
cious operation of monetary policy and through macro-prudential and
regulatory measures.” However, such measures may not be enough. In
addition, a case was made for “market friendly” policies that better align
the incentives of financial managers with society’s appetite for financial
risk (Rajan).
Not all participants shared this view. Some participants saw finan-
cial deregulation and innovation as reducing risk and better allocating
risks across the global economy. Technological change and financial
market innovation have reduced transactions costs and led to the cre-
ation of new financial instruments. These new financial instruments
have increased liquidity and allowed various types of risk to be divided
among investors according to their risk tolerance. By reducing the price
of risk and increasing liquidity, financial innovations have likely chan-
neled savings into riskier investment projects, but they have not
necessarily increased systemic risk. Finally, financial innovation may
have contributed to the reduced volatility of output and inflation in
many industrial economies over the last 20 years (Kohn). 
This more sanguine view of recent financial developments does not
imply that financial market regulation is obsolete. Rather, it suggests a
need for ongoing review and modernization of regulatory structures,
supplemented by the regulation of the marketplace itself. That said,
some participants expressed skepticism about the desirability of regulat-
ing the incentive structures of financial managers.    
A third challenge for the future was addressed by Chairman
Greenspan himself. In his opening comments, Greenspan pointed to
the growing importance of asset price movements in economic forecasts
and policy resulting from the sharp increase in household net worth rel-
ative to disposable income since the mid-1990s. This increase has been
driven, first, by a run-up in stock market prices, then by accelerating
house prices. Greenspan cautioned that many investors seem to have
grown complacent in their expectations of continued asset price 
 ECONOMIC REVIEW • FOURTH QUARTER 2005 43
appreciation and in requiring less compensation for taking on risk.
Greenspan noted that “history has not dealt kindly with the aftermath
of protracted periods of low risk premiums.”       
Lessons learned
Participants drew a number of lessons from the Greenspan era
that might help policymakers in their conduct of monetary policy in
the future. One general area of agreement was that moves toward
greater transparency that have been undertaken by a number of
central banks including the Federal Reserve have helped make mone-
tary policy more effective. Further steps toward transparency were
seen as desirable, although participants disagreed about the kinds of
steps that should be taken. 
The importance of clear communication and transparency follows
from the idea that forward-looking households and businesses form
expectations about future monetary policy, and that these expecta-
tions influence their actions. Thus, policymakers influence the
economy not just through the current setting of the overnight rate but
also through their influence over the public’s expectations of future
policy. To the extent policymakers can respond systematically to the
state of the economy and can credibly communicate this response to
the public, smaller moves in the overnight rate might lead to a larger
response of long-term interest rates and a bigger impact on output
and inflation (Woodford).
While participants agreed on the importance of policy expectations,
they disagreed on how best to influence expectations. One view was
that central banks should commit to a policy rule, follow it systemati-
cally, communicate it in words and actions to the public, and issue
statements about the expected future path of the policy instrument.
Announcing a commitment to a future path for the policy instrument
could prove highly useful in unusual situations, such as when there is a
risk of deflation and nominal interest rates have already been reduced to
near zero. The Federal Reserve’s policy statements following the 2003
period when the federal funds rate fell to 1 percent were cited as an
example of effective signaling of future policy (Woodford). 
 44 FEDERAL RESERVE BANK OF KANSAS CITY
Signaling of future policy has also played a central role in the Bank
of Japan’s strategy to move from deflation to price stability. In particu-
lar, the Bank of Japan has committed to maintain its policy of
quantitative easing until the economy achieves “stability above zero of
the core consumer price index on a year-to-year basis”—although the
numerical upper limit has not been announced (Iwata).
Other participants, while agreeing in principle with the desirabil-
ity of systematic policy and instrument rules, placed relatively more
emphasis on the need for transparency about policy objectives and
advocated numerical targets for inflation. “Whilst the central bank
must always be ready to take aggressive action if needed, a well-
designed institutional framework, which undisputedly assigns the
central bank the primary objective of price stability, and the adoption
of a clear monetary policy strategy, which quantitatively defines price
stability and does not pretend to fine-tune directly the business cycle,
can make the latter type of policy activism unnecessary in many cir-
cumstances” (Trichet). In particular, the quantitative objective for
inflation anchors inflation expectations and helps the public antici-
pate how the central bank will adjust overnight rates in response to
macroeconomic conditions. 
Participants also offered lessons of a more general nature. One set of
lessons focused on broad principles that could be applied to many areas
of policymaking. First, a successful policymaker “recognize[s] that eco-
nomics tells you how to think, not what to think.” Accordingly,
policymakers should be skeptical that any economic model accurately
describes how the economy responds to policy. Second, useful informa-
tion often comes from sources other than econometric models and
official data. Indeed, qualitative data from businesses can help policy-
makers identify trends before they show up in the data, as was the case
when Chairman Greenspan detected an upturn in trend productivity
growth well before the data proved it. And third, economic policy is
best thought of “as an environment in which the decisions of house-
holds and firms are not marginally affected by the need to insure against
future arbitrary or mischievous changes in government policy.”
Applied to monetary policy, this lesson means economic agents should
not have to take inflation into account when they make decisions about
the future. They should be able to plan on price stability (King).
 ECONOMIC REVIEW • FOURTH QUARTER 2005 45
Another broad set of lessons had a similar tone but focused more
directly on central bankers. First, central bankers should be prepared to
confront new risks at any time. These risks are the counterpart of rapid
technological change, globalization, and rapid structural change.
Second, as a result, central bankers should not depend on a single
model of the economy but instead look for policies that are robust
across a range of models. Finally, a credible commitment to price stabil-
ity is essential for anchoring inflation expectations (Trichet).
Conclusion
At the conclusion of the symposium, Chairman Greenspan offered
some thoughts about the future. He noted the aging of the population
and described its profound effects on the economy and economic
policy. He predicted the housing boom will “inevitably simmer down,”
that housing equity extraction will subside, and that consumers will
increase their savings. With the resulting slower pace of consumer
spending and reduced demand for imports, the current account deficit
will decline. Whether the decline will be orderly or abrupt will depend
on maintaining, if not increasing, the flexibility of economic institu-
tions in the United States and abroad. 
With respect to monetary policy, Greenspan expects continued
refinement of the risk-management paradigm. However, he expressed
skepticism about the usefulness of numerical inflation targets in the
United States and the ability of central banks to successfully target asset
prices. Greenspan concluded by saying, “Surely difficult challenges lie
ahead for the Fed, some undoubtedly of our own making, and others
that will be thrust on us by market or other forces… I have little doubt
that my successors, and theirs, will continue to sustain the leadership of
the American financial system in an ever-widening economy.”    
 

The Greenspan era : lessons for the future : a summary of the Bank's 2005 Economic Symposium

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