How Does the FOMC Learn About Economic Revolutions? Evidence from the New Economy Era, 1994-2001

Business Economics, Forthcoming

Federal Reserve Bank of St. Louis Working Paper No. 2011-041A

53 Pages Posted: 12 Apr 2012

See all articles by Richard G. Anderson

Richard G. Anderson

Federal Reserve Bank of St. Louis - Research Division

Kevin L. Kliesen

Federal Reserve Bank of St. Louis - Research Division

Date Written: December 1, 2011

Abstract

Forecasting is a daunting challenge for business economists and policymakers, often made more difficult by pervasive uncertainty. No such uncertainty is more difficult than projecting the reaction of policymakers to major shifts in the economy. We explore the process by which the FOMC came to recognize, and react to, the productivity acceleration of the 1990s. Initial impressions were formed importantly by anecdotal evidence. Then, policymakers — and chiefly Alan Greenspan — came to mistrust the data and the forecasts. Eventually, revisions to published data confirmed initial impressions. Our main conclusion is that the productivity-driven positive supply side shocks of the 1990s were initially viewed favorably. However, over time they came to be viewed as posing a threat to the economy, chiefly through unsustainable increases in aggregate demand growth that threatened to increase inflation pressures. Perhaps nothing so complicates business planning and forecasting as policymakers who initially embrace an unanticipated shift and, later, come to abhor the same shift.

Keywords: FOMC, productivity, learning, financial crisis

JEL Classification: D70, D71, E52, E58

Suggested Citation

Anderson, Richard G. and Kliesen, Kevin L., How Does the FOMC Learn About Economic Revolutions? Evidence from the New Economy Era, 1994-2001 (December 1, 2011). Business Economics, Forthcoming; Federal Reserve Bank of St. Louis Working Paper No. 2011-041A. Available at SSRN: https://ssrn.com/abstract=2038598

Richard G. Anderson (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Kevin L. Kliesen

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

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