Essays in Honour of Charles Goodhart, Volume One
Edited by Paul Mizen
Chapter 6: The phases of US monetary policy: 1987-2001
6. The phases of US monetary policy: 1987–2001 Marvin Goodfriend1 1. INTRODUCTION Inﬂation was relatively well-behaved in the 1990s in comparison with preceding decades, yet Federal Reserve monetary policy was no less challenging. The Fed took painful actions in the late 1970s and early 1980s to reverse rising inﬂation and bring it down, and inﬂation fell from over 10 per cent to around 4 per cent by the mid-1980s. The worst economic ills stemming from high and unstable inﬂation were put behind us. Yet central bankers and monetary economists recognized that more disinﬂation was needed to achieve price stability. Completing the transition to price stability was expected to be comparatively straightforward. Monetary policy promised to become more routine. Although the 1990s saw the longest cyclical expansion in US history, the promised tranquility did not materialize. In many ways the period to be chronicled here proved to be about as diﬃcult for monetary policy as the preceding inﬂationary period. My account of Fed monetary policy divides the period since 1987 into six distinct phases. This division is a natural one because in each phase the Fed was confronted with a diﬀerent policy problem. Phase 1 begins with rising inﬂation in the aftermath of the October 1987 stock market crash and ends with the start of the Gulf War in August 1990. Phase 2 covers the 1990–91 recession, the slow recovery, and the disinﬂation to the end of 1993. Phase...
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