Thursday, January 22, 2009

What Should Central Banks Do?

Today's post relates to the following Keystone Economic Principles:

3. All choices have consequences.
4. Economic systems influence choices.

The most recent issue of Monetary Trends, produced by the Federal Reserve Bank of St. Louis, addresses whether the Federal Reserve should be taking on all kinds of "securities" and expanding its balance sheet as it tries to bring stability back to the financial system.

The essay refers to the classic work by Walter Bagehot. For those of you who are not familiar with Bagehot, he was one of the first editors of The Economist magazine, and his book, Lombard Street, remains one of the classics in macroeconomics from a period before there was macroeconomics.

For what it's worth, the author seems to think the Fed is doing the right thing. Right or wrong - based on the essay, Bagehot would approve.

The essay is worth a look.

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