Greenspan Essay, Research Paper

Federal Reserve Board Chairman Alan Greenspan vows to promote ?low and stable inflation.? The main goal of the U.S. economy is to maintain price stability. This reduces the likelihood that imbalances could develop that would ultimately undermine the record economic expansion that the U.S. is currently having. The United States has two basic goals for its economy: to promote maximum output and employment and to promote stable prices. In the long run, the level of output and employment in the economy depends on factors other than monetary policy. These include technology and people’s preferences for saving, risk, and work effort. So, “maximum” employment and output means the levels consistent with these factors in the long run.

Inflation is a major concern for the economy of the United States. High inflation can hinder economic growth. For example, when inflation is high, it also tends to vary a lot, and that makes people uncertain about what inflation will be in the future. That uncertainty can hinder economic growth in a couple of ways. For example, it adds an inflation risk premium to long-term interest rates, and it complicates the planning and contracting by businesses and households that are so essential to capital formation. High inflation also hinders economic growth in other ways. For example, because many aspects of the tax system are not indexed to inflation, high inflation distorts economic decisions by arbitrarily increasing or decreasing after-tax rates of return to different kinds of economic activities. In addition, it leads people to spend time and resources hedging against inflation instead of pursuing more productive activities. Inflation is controlled mostly by the Federal Reserve System, which controls the availability and cost of money and credit. Even though monetary policy can’t affect either output or employment in the long run, it can affect them in the short run. For example, when demand occurs and there is a recession, the Fed can stimulate the economy and help push it back toward its long run level of output by lowering interest rates. Therefore, in the short run, the Feds are concerned with stabilizing the economy. That is, smoothing out the peaks and valleys in output and employment around their long-run growth paths.