July 20, 2000

Alan Greenspan's performance as Fed chairman has been deserving of the Nobel Prize in economics. During his watch, the U.S. inflation rate has declined from the 4 to 6% range to the neighborhood of 2%, and much of his success can be attributed to the adoption of a domestic price rule for guiding monetary policy. The operating procedures of the price rule are quite simple: It assumes that inflation is too much money chasing too few goods. A rise in the U.S. inflation rate becomes prima facie evidence of too much money. Since the Fed does not produce any goods and produces money, the way for the Fed to eliminate any undesired fluctuation in the U.S. inflation rate is by altering the quantity of money circulating the economy.

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