To honor Martin Feldstein’s distinguished leadership and extraordinary contributions to the National Bureau of Economic Research, the Feldstein Lecture addresses an important question in applied economics, with an application to economic policy. In this inaugural lecture I consider macroeconomic policy during the financial crisis.
It is useful to divide the financial crisis into four phases: (1) the “root cause” period from 2003 to 2006, (2) the period from the flare-up in August 2007 to the panic in September 2008, (3) the panic period in September-October 2008 (4) the post panic period. Here I look at the fourth phase and focus on monetary policy.
I emphasize real time policy evaluation because the crisis is ongoing and because the research is quite different from many existing monetary policy evaluations which examine policy over decades. The financial crisis has made real time evaluation essential because of the rapid changes in events and policy. In addition to loads of new data and policies, real time evaluation must address new methodological questions about the use of high frequency data and simulation techniques. Because of blogs, the 24-hour news cycle and the rapid spread of ideas, the need real time policy evaluation is here to stay.
To evaluate monetary policy during this period I develop a specific quantitative framework in which I compare actual policy with certain counterfactual policies. It is not enough to say policy is good or bad in the abstract; you need to say “compared to what” and be able to measure the different impacts. The framework requires that one characterize actual policy and then choose an appropriate counterfactual policy to compare it with. Both are difficult tasks and there are alternative ways to go about them. What is most important at this early stage is the quantitative framework—a policy evaluation tool which researchers can use in different ways.
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