For those of us disappointed with the Fed's performance over the past decade, it is natural to wonder if the conduct of monetary policy will be better going forward. Well, if history is any guide then don't get your hopes up. That is the conclusion I draw from a new paper by George Selgin, William D. Lastrapes, and Lawrence H. White where they systematically explore the Fed's performance since its inception in 1913. Here is the abstract:
In short, it is difficult to make the case that Fed has truly made a meaningful improvement in macroeconomic stability over its almost 100 years of existence. Sigh.
As the one-hundredth anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation's experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we find the following: (1) The Fed's full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed's establishment. (2) While the Fed's performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.