Friday, November 5, 2010

More on Monetary Policy

A good friend and colleague in Chicago sent me this link to a post on National Public Radio's Planet Money blog. It offers a unique translater for the most recent FOMC statement.  I think you'll find it amusing...and hopefully useful.

6 comments:

Remigio Mundo said...

I am currently studying these topics in my Macroeconomics class and the way I see it wouldn't this Policy actually have a good impact? This is how I see it: correct me if am wrong but the purpose here is to buy all these bonds and cause inflation to rise, then it would depreciate the value of the dollar. Therefore it would increase the amount of Exports thus encouraging the companies to invest in capital goods as well as the incentive to hire more workers. As an outcome reducing the high unemployment rate. However another question is can the Fed really accomplish this on its own? Wouldn't it be preferable to have a fiscal policy to accompany it?

Tim Schilling said...

Much of what you said is the argument for quantitative easing and it is, undoubtedly, what many are hoping will happen.

The counterargument is the monetary policy's only real effect, in the long-term, is to contain inflation. This may mean that fiscal policy could be more effective. But if fiscal policy is already imbalanced, additional fiscal stimulus in the form of deficit spending could result in a crowding out, i.e. more borrowing results in higher interest rates which can be as much of a hinderance to recovery as higher taxes can be.

All in all, we could borrow from one half of the classic comedy team, Laurel and Hardy - "Here's another fine mess we've gotten ourselves into."

Joanna Sengdara said...

I see what the Fed is trying to do here: raise inflation and lower the uemployment rate. But if this doesn't work, it won't be too late to switch to the fiscal policy, right? Because didn't Zimbabwe have a monetary policy? They printed out too much money and that led to a decline in their economy and quality of life. The same could happen to the US. I mean, the Fed would have to be on close watch, wouldn't they?

Tim Schilling said...

Joanna,

You are right that the Fed is hoping to move unemployment down by stimulating economic activity. But my guess is they believe they can do so without seeing a significant upturn in inflation.

I'm certain the Fed doesn't intend to do what Zimbabwe did. That was as much a result of Zimbabwe's central bank being directly answerable to the head of Zimbabwe's government as it was a deliberate desire to have hyperinflation.

But one has to question whether fiscal policy can be effective under current conditions. Many think it can. Others think it can't. But the reality is that deficts and debt can matter.

Clay said...

Tim,
Isn't the Fed attempting to raise inflation? My understanding is that inflation is dangerously low.

If the attempt is to suddenly get many foreign companies purchasing US goods to try and offset a little of the (X-M) than I don't see how this policy can be effective in the short run. Sure, I'd always be looking out for the lowest price if I was running a business, but years spent with customers has a lot of benefits (lower prices, you understand how their business is run, etc.).

In the short run I can see this raising inflation and lowering unemployment. But what is going to happen to interest in bond terms? Shouldn't it rise?

Tim Schilling said...

Clay,

I believe the Fed is trying to raise inflation, hoping that there will be something of a trade-off with unemployment - essentially invoking the reaction you see in a classic Phillip's curve.

I'm not sure it will work in the current uncertain business environment. From what I read, both consumer and business expectations are still uncertain, although they may be better than the were at the depths of recession.

The problem with measures of expectations like consumer confidence, etc. is intentions are not actions.