Wednesday, April 22, 2009

A Little Bit of Macro for the Classroom

When teaching macroeconomics, we spend time discussing the impact of policy on the economy. There's an interesting essay in the current issue of Monetary Trends, which is published by the Federal Reserve Bank of St. Louis.

In the essay, the author examines the impact of monetary growth on GDP. This is relevant because the Federal Reserve (and other central banks) have been using various tools to stimulate economic growth, not the least of which has been increasing the monetary base - the reserves that impact the amount of lending in the banking system.

The article indicates that there is a positive relationship. However, it also indicates that the relationship is not causal (i.e. money growth is not the cause of GDP growth), and that the lag between increase in the money base and GDP growth appears to be about three years.

I think that has some significant implications not only for policy, but should have some implications on how we teach about policy and the larger economy. (Those of you still involved in the Fed Challenge may find this of interest, as well.)

What are your thoughts?

This post relates to the following Keystone Economic Principles:
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.

4. Economic systems influence choices.
and
7. Economic thinking is marginal thinking.

1 comment:

Mike Fladlien said...

I want to bring in some candy that can be used for money and auction off an item. Then I want to triple the amount of candy in the room and auction off the same item. The price should go up. I did make the mistake of think that an increase in the money supply would increase nominal GDP. Good post.