Greenspan's Conundrum

Abstract:     
In the summer of 2005, Alan Greenspan was faced with a conundrum. Despite a background of rising short-term rates, economic strength, and inflationary pressures, long-term rates had not risen at all. If long-term rates remained low, economic activity would likely strengthen and create further inflationary pressures. If some new force were depressing long-term interest rates, however, its removal could spark a disconcertingly sharp increase in rates. Either way, Greenspan would have to get to the bottom of this puzzlement.

Keywords: business and government relations, interest rates

Working Paper Series