mervyn king : jackson hole conference - remarks to the central bank governors ’ panel remarks by mr mervyn king, governor of the bank of england, at a symposium sponsored by the federal reserve bank of kansas city, jackson hole, wyoming, 27 august 2005. * * * jackson hole speakers normally draw out the lessons of economic theory for one specific area of policy. but this year we are trying to distil lessons from the practice of monetary policy in the united states - over an extraordinarily successful quarter century under the leadership of alan greenspan – for the theory of monetary policy. at most celebrations of a long and successful career, invited speakers talk at length and the great man himself is allowed a few minutes at the end. it is a remarkable tribute to alan that on this occasion the tradition has been turned on its head. we all remain intrigued by what he has to say. in the few minutes i am allowed, i want to describe the three important lessons that i have learnt from alan during my time at the bank of england. first, to be a successful central banker requires an extraordinary degree of objectivity. the key is to recognise that economics tells you how to think, not what to think. it is not a set of settled conclusions about issues. above all, it is vital never to confuse the world with a model. the whole point of a model is to abstract from a wide range of factors in order to think clearly about one particular issue. let me describe an example of what i shall call “ the greenspan approach to economics ”. it concerns the ‘ lucas critique ’. robert lucas ’ 1976 paper encouraged economists to construct models which incorporated explicit optimising behaviour by households and firms. unfortunately, some of them urged policy - makers to apply the lessons from their models as literally as the enthusiasts of the engineering approach to macroeconomic policy had done so in the 1950s and 1960s. the greenspan approach to economics would advise great caution. the insight of the lucas critique is that we need to think about the responses of rational households and firms when analysing the consequences of alternative policies. but the likelihood that any particular model captures how the real economy would respond to a given change in policy is vanishingly small. lucas did not pretend that there existed a single “ true ” model from which could be drawn unequivocal predictions about the impact of policy changes. the second lesson from alan ’ s time at the federal reserve is that empirical knowledge is not confined to the eco

story is that it may be risky to infer from the observation that inflation expectations are stable that all is well. there will be times when large and persistent shocks occur, and it would be unwise to count on inflation expectations remaining stable when actual inflation starts to deviate substantially from its recent range. so those are the three lessons that i have learnt from alan : ( i ) a recognition that economics is not a set of doctrines but a way of thinking ; ( ii ) the importance of using qualitative and quantitative information from a range of sources ; ( iii ) there are a small number of fundamental objectives that are crucial and which we can judge by the greenspan yardstick of whether we have freed businesses and households from the burden of expending resources to deal with unnecessary policy volatility. alan ’ s departure from the central banking scene will deprive us of a source of wisdom, inspiration and leadership. to be sure, alan ’ s words, whether spoken or written, will surely still reach us from the sidelines. to use a tennis analogy, i see alan as the central banking equivalent of the non - playing captain of a davis cup team, encouraging the younger and less talented members, and stressing the importance of footwork, timing and getting into position early. alan, thank you for raising the respect which others give to our discipline of economics and our profession of central banking. transparency in monetary policy. at the federal reserve bank of st. louis, economic policy conference, st. louis, missouri, october 11, 2001. this definition was set out much earlier, in similar terms, in alan greenspan ’ s statement before the committee on ways and means, u. s. house of representatives, january 25, 1990.