Friday, February 13, 2009

On Monetary Policy and Theory

This post relates to the following Keystone Economic Principles:
1. We all make choices.
3. All choices have consequences.

4. Economic systems influence choices.
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

With the recent focus on fiscal policy stimulus, there's been renewed interest in John Maynard Keynes, the British economist who penned The General Theory of Employment, Interest and Money. But we've also been more cognizant of the role of central banks and the Federal Reserve in particular. And because of this, I'd like to draw your attention to a number of resources that may be of use to you and your students when you approach the topic central banks and monetary policy. I particularly recommend it if you are a school that participates in an economic competition such as The Fed Challenge.

The first resource is an EconTalk podcast with host Russ Roberts and Tyler Cowen, one of Robert's colleagues at George Mason University. Last spring, Russ and Tyler did a program on monetary policy. It was interesting and informative. And it provided a good solid explanation of the function of monetary policy in the economy. At a couple points, Cowen clarifies some misconceptions that plague many adults. And he also explains some of the limits of monetary policy, particularly in the current environment.

The second resource is this article from The Economist about Irving Fisher. (HT to Greg Mankiw.) Fisher was a contemporary of Keynes and was probably the best-known American economist at the time. And while he was brilliant (he first put down the formula that provides the name for this blog), he is unfortunately usually only remembered for stating that the stock market had reached "a permanently high plateau" - in October, 1929. But Keynes noted that much of what he learned about interest rates and integrated into his work he owed to Fisher. I'll put that down as high praise.

Finally, if the article about Irving Fisher moves you to learn more, one of his paperss about a Debt-Deflation Theory of Great Depressions is on-line, thanks to the folks at the Federal Reserve Bank of St. Louis. While I wouldn't offer this to most students, some of your better ones may find it interesting. It's relatively short (21 pages) and doesn't contain a lot of mathematics.

Now I know many of you may have other things to do this weekend. That's okay. I suspect most of you aren't up to monetary policy in your class yet, anyway. But file this stuff away. I think it could be useful.

As always, I look forward to your thoughts on the matter.


Julia said...

Tim, this was great. I used both for week-end readings for the team.
Thank you for the heads-up on the Economist article--I hadn't had a chance to even look at the new issue for the link to Fisher's article.

Mike Fladlien said...

I can't wait to read the paper. One of my coworkers is doing her masters degree on the similarities between the 1930's and now and i'm going to help her with some of the econ. What a great place to begin...