Jean-Claude Trichet and his colleagues at the European Central Bank have clearly learned the wisdom of Paul Volcker: without first establishing anti-inflationary credibility, all is lost. The question now is whether they should learn the wisdom of Alan Greenspan – that the economy’s speed limit can change and that policy may have to be adapted accordingly.
Developing this insight and acting upon it were arguably Greenspan’s greatest achievements. In a series of speeches starting in 1995 that many observers initially dismissed as an effort to evade questions of policy, the Maestro raised the possibility that the sustainable rate of economic growth had increased due to the productivity-enhancing effects of new information and communications technologies. From January 1996 through June 1999, the Fed did not raise interest rates despite strong economic growth that, under other circumstances, would have fanned fears of inflation. Monetary policy did not choke off the expansion. Continued strong investment supported the deployment of the new productivity-enhancing infrastructure.
Stephen Kinsella
Economist at the University of Limerick
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