Shaping Policy Through Shadowing

In 1971, when President Nixon yielded to political pressures and instituted wage and price controls to tame inflation, Carnegie Mellon Professor Allan Meltzer was among those who considered the decision to be wrong. So, in an effort to improve the way economic policy is formulated, he joined forces with some other influential economists and founded what's known as the Shadow Open Market Committee.

By "shadowing" the Federal Reserve's Open Market Committee and providing thoughtful commentary on the Fed's decisions, the group hoped to improve debate on the subject.

"Our objective at the time and after was not just to complain about the results of policy actions," Meltzer explained. "We wanted to show that better policy choices were available and that inflation could be controlled at an acceptable cost if the Federal Reserve controlled money growth."

The committee members quickly earned the attention of policymakers and the business press — a tradition carried on today by the faculty at the Tepper School's Gailliot Center for Public Policy. When policymakers and business journalists need articulate views on monetary policy, they turn to Gailliot Center economists Meltzer, Marvin Goodfriend and Adam Lerrick.

"Today we know that the solution to inflation is to carefully control the money supply and give maximum freedom of action to markets," Goodfriend said. "That lesson, painfully learned, is now solidly understood and is knowledge that central bankers everywhere can use to avoid the misery that inflation inflicts."

The U.S. Federal Reserve, Congress' Joint Economic Committee and other domestic and international policymakers also recognize the contributions academic economists can make, which is why they frequently turn to Gailliot Center faculty members for advice.

Meltzer is the world's leading expert on central banks and is completing the second volume of his widely acclaimed history of the Federal Reserve. A paper co-authored by Goodfriend on monetary policy options facing China has been discussed by policy makers inside China and the U.S. Lerrick is credited with devising a market-based solution to Argentina's $100 billion debt crisis.

The Gailliot Center is a leading research center focused on developing market-based solutions to economic policy problems. Initially established in 1973, it was reinvigorated in 2002 with support from former Federated Investors senior executive Henry J. Gailliot, a Carnegie Mellon alumnus and life trustee.

Related Links: Tepper School of Business  |  Heinz School

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