Alan Greenspan in 2004

Alan Greenspan, then Chairman of the US Federal Reserve Bank System, speaking in January 2004, discussed the failure of traditional methods in econometrics to provide adequate guidance to monetary policy decision-makers.   His words included:

Given our inevitably incomplete knowledge about key structural aspects of an ever-changing economy and the sometimes asymmetric costs or benefits of particular outcomes, a central bank needs to consider not only the most likely future path for the economy but also the distribution of possible outcomes about that path. The decisionmakers then need to reach a judgment about the probabilities, costs, and benefits of the various possible outcomes under alternative choices for policy.”
The product of a low-probability event and a potentially severe outcome was judged a more serious threat to economic performance than the higher inflation that might ensue in the more probable scenario.”

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