Jim Hamilton questions the Greenspan’s “measured pace” mantra from the early 2000s

Our conclusion is that the measured pace at which Greenspan increased interest rates over 2004-2005 may have been counterproductive, and that economic performance might have been improved if the Fed instead had raised interest rates more quickly to the higher warranted levels.

Free Exchange piles on

This strategy may well have seemed prudent at the time, but in retrospect it appears to be among the worst possible polcy decisions—too tentative to shake the bubble mindset developing in housing, and least accommodative just as the bubble was running out of steam and the economy was heading for deep recession.

I’ve thought that much of the second guessing of Greenspan’s monetary policy was the product of short memories. For example John Taylor has argued that the Fed kept rates too low for too long, seemingly forgetting that we were in the neighborhood of the zero lower bound and that Greenspan avoided it by promising to leave rates low longer than we would otherwise expect.

That is, Greenspan made a credible promise to be irresponsible and it worked. Deflation never appeared and by many measures the 2001 recession was the weakest in post war history.

These new points, however, drive me to reconsider some of those choices. I did think at the time that the measured pace approach was the best, but for no particularly rigorous reason. My thought was simply that large increases in the interest rate would be too shocking. That is, to say I was working from some sort of implicit adaptive expectations model.

The problem, however, with implicit models is that you don’t actually spell out your assumptions and at least those related to the way financial markets would have responded appear to be wrong.