Here are the directions to post your talking points to my blog. First clink on the comments link. Next highlight and copy your talking points. Now come back to the comments page and paste them into the “Leave your comment” window. Just below the “Leave your comment” window choose your identity as “Other” and type your first and last name in the appropriate box (this is how you will get credit for your talking points – note: after the final exam I will delete all comments). If you wish to preview how your talking points will look in the comment section click on the “Preview” button. Use the back button if you wish to further edit your talking points. Once you are happy with the way your talking points will look click the “Publish” button and you are done!
There is currently no way to edit published comments so if you wish to change your talking points you will have to delete your comment and re-post an improved set (only you and I can do this). To delete your comment click on comments, then scroll to the end of your comment and click on the trashcan below and to the left of your comment. Next check the box for "Remove forever?" then click on "Delete Comment." At this point follow the directions in the first paragraph to re-post your talking points as a comment.
I hope this was useful. If you encounter problems posting to the blog please email me (do not be worried if your talking points do not seem to be published immediately as there may be a delay until I manually "re-publish" the entire blog).
1. One of the main problems of monetary policy is the short-run trade off between inflation and employment stability. Performing flexible inflation targeting may help alleviate this problem, which means aiming to stabilize inflation at low level with some weight also on stabilizing output gap. 2. Measuring the output gap is difficult since not all wages and prices are flexible. The solution to this problem is by using the speed limit policies. We should focus on the changes in output gap rather than on its output level. This will improve some measurement problems that affect estimates of the level of gap. 3. Lags between monetary policy actions is another major issue. We can look forward and perform forecast targeting. However, it is difficult to forecast future economic conditions and decide on the appropriate interest rate. It requires good data, good economic models, and good policymakers with good judgments. 4. Management of expectations is crucial for monetary policy. Therefore, the transparency and public understanding of monetary policy increase the effectiveness of monetary policy. Transparency is also important for the credibility of central banks as policymakers maybe inconsistent over time. 5. Liquidity trap is another important issue. It is a situation where the instrument rate is at is minimum, zero, but the real interest rate is still too high. When the interest rate is zero, expansionary monetary policy has practically no effect in bringing the economy back to potential.
1.Monetary policy is neither an art nor a science but a combination of the two. Well-educated economists need a leader in conjunction with models in order to construct an appropriate policy. 2.Finding the actual output gap is near impossible due to the difficulty in determining the level of potential output. In order to refrain from basing a policy on incorrect information, the Fed should look into following a “speed limit policy” and focus on the growth rate of trend output and the growth rate of output. 3.The Fed needs to ensure that there is transparency in their monetary policy. This will only occur if the public is provided identical information as the Fed. 4.Due to the fact that most recessions in the U.S. have been relatively short, policymakers are not able to keep up with the economy’s self-correcting ability. That is, the time it takes for policy makers to devise a policy and to get it approved, the lag-time that has been created allows the economy to recover. Therefore, the policy will be inappropriate for the current state of the economy. 5.In order to devise a fiscal policy for the future, policymakers need to determine how a potential policy will affect the public’s expectations about government spending and changes in taxes in the future.
1.While there are formulaic methods of determining what economic policies to pursue in a given situation, intuition and good judgment are necessary in order to institute these policies effectively.
2.While economists agree that the gap between potential output and actual output is among the best indicators of the economy’s status, a major difficulty of economic policy making can come from the difficulty of accurately measuring this gap.
3.Discretionary fiscal policy can be used as a tool to stabilize the economy in the case of a recession; however, because of the lag from when fiscal policy is recommended to when it affects change, and because of the short duration of most recent recessions in the U.S., unless the recession is extreme to the point where interest rates have dropped to zero many economists see fiscal policy as an inefficient stabilization method.
4.Transparency can help monetary policy to be more effective because if the public is given full disclosure about the objectives of the Fed, they are more likely to act in accordance with the policies being enacted.
5. Much of economics is based on trying to predict the future; economists must try to predict what the economy will do in the near future and pre-empt it with the appropriate actions, and according to the Ricardian equivalence, people regulate their spending habits in accordance with what they predict will be their future economic situation.
1. Because there is a significant time-lag when it comes to applying monetary policy changes, economists must always be forward-looking and make correct forecasts. 2. Although scientific principles provide a generic formula for monetary policy, it also takes good judgment to fine-tune the system. 3. The Fed uses the output gap as a way to determine economic health. Because this is extremely difficult to measure, a speed-limit policy which relies on the rates of growth may sometimes be more appropriate. 4. Although transparency in monetary policy holds policy-makers accountable, it may also risk inflation because it creates expectations. 5. The ultimate challenge of the Fed is to determine an acceptable trade-off between unemployment and inflation.
1. If policy-makers are not consistent with their policies over time, they will lose credibility and the public might disregard their future goals and actions. 2. Under the pure Ricardian view, people base their consumption on what they think the government's future economic decisions will be, and not the current decisions. 3. Even if the goals of the Fed are transparent, the public may not understand the purpose of Fed policies because they don’t have the same level of knowledge and information. 4. Fiscal Discretionary Policy is not always a good way to control the economy because the state of the economy could have changed during the time lag that it takes to enact policy changes. 5. Automatic stabilizers a good example of how passive policies can help adjust the economy.
1. Unlike fiscal policy, monetary policy is implemented immediately however it can take up to eighteen months for changes in the economy to take place.
2. No policy maker is able to see the exact current state of the economy, and as a result, policy makers can only make decisions based on economic forecasts or historical data, which do not allow for a perfect policy decision.
3. Many different schools of economic thought exist, and it is important for all policy makers to understand differing schools of thought as well as be able to defend their chose school of thought.
4. Policy makers must decide which is more important to maintain a prosperous economy, inflation or unemployment; high inflation comes with low unemployment and high unemployment comes with low inflation. It is a tradeoff.
5. Monetary policy is a more potent and effective tool in the short run, but one must remember that neither monetary or fiscal policy will have an effect on long run economic growth.
1. Traditional economic models would suggest that increases in government spending or decreases in taxes would affect the output level, however, this may not be the case because the Ricardian view suggests that consumers should not spend more as an immediate result of a tax cut, which will be “rescheduled” for later. 2. The Lucas critique also claims that traditional economic models do not accurately take into account the impact of policies upon expectations. Instead, it is necessary to take into account other alternative policies which will also affect expectations and behavior. 3. Since measurements are not necessarily accurate and there is a lot of imperfect information at a given time about the output level, economists must be extra cautious when assessing the effects of policies. 4. It is also important to take into account policy lags, such as the inside lag which is the time between a shock to the economy and the policy’s action which responds, as well as the outside lag, which is the time between a policy action and its influence upon the economy. In formulating economic policy, these lags play a crucial role in determining the effectiveness of a policy. 5. The speed limit approach is more telling as it takes into account real activity and the differences in growth rates, which better explain the state of the economy.
1. Good policymaking requires a combination of general principles and good judgement.
2. Transparency regarding objectives, economic conditions and economic models may be beneficial because the public has the right to hold the Fed accountable for policy.
3. Long lags involved in changing fiscal policy make it a less effective tool for correcting recessions than monetary policy.
4. Expansionary fiscal policy may indicate that taxes will rise in the future, which could alter people’s expectations and have a contractionary effect on the economy.
5. Speed Limit policies are an effective way to control people’s expectations.
-Policymakers can make a country’s economy their masterpiece when policy decisions are based on good judgment, good data and good models. -Greater independency of central banks should come hand in hand with higher transparency in monetary policy. -The public’s expectations can determine whether the Fed decides to reverse the policy announced causing a general lose of credibility, leaving the Fed with the need of making greater monetary changes in order to control the economy. -Discretionary fiscal policy comes in handy when monetary policy is unable to get the economy back in track. -The greatest problem all policymakers face is the insufficient data about the economy’s performance at an exact moment in time.
1. While several principles provide guidance for monetary policymaking, FED still needs its own professional judgment to successfully stabilize our economy. 2. Being an crucial information for monetary policymaker, output gap is yet very difficult to measure. 3. Mistaking the slow down of actual output as a sign of recession instead of a slower potential output growth can lead to an inappropriate monetary policy which would exacerbate the situation. 4. Expansionary policy in form of higher government purchase, associated with a huge budget deficit, can be contractionary. 5. Fiscal policy has a very limited influence on short-lived economic problems as it is always delayed by various administrative procedures.
1. Popular methods of economic forecasting involve econometric models and a composite index of leading economic indicators which include weekly claims for unemployment insurance, the quantity of new building permits issued, and the M2 money supply of the economy.
2. The Fed faces two distinct types of delays before its policies can take effect--an inside lag that is the time between shock and policy action, and an outside lag of around 9-18 months from policy decision to impact on the economy.
3. The advantage of speed limit policies in the Fed is that they avoid the time inconsistency problem: by committing the Fed to altering the rate of change of the output gap, the public has a clear indication that the Fed will remain consistent in its goals.
4. Transparency in monetary policy carries the danger that variation in the Fed's declared economic objectives creates an immediate volatility in the public's expectations of inflation.
5. Monetary policy is as much an art as a science, owing much of its success to prudent choices at critical moments by leading Fed economists.
1. Although policy transparency holds policy-makers accountable for their decisions, it creates a less stable inflation rate because the additional information has a dramatic effect on the public’s inflation expectations.
2. Passive economic policies such as income tax and welfare payments are normally sufficient to stabilize the economy, but in times of prolonged recession, active economic policy can successfully increase output.
3. The inside lag is the main reason monetary policy is preferred over discretionary fiscal policy in combating short run recessions.
4. The theory of time inconsistency implies fixed policy rule is mostly superior to discretionary policy because policy-makers are compelled to follow through on their promises and the public’s inflation expectations remain stable
5. The fact that the output gap is difficult to estimate complicates the process of determining the extent to which monetary policy should be enacted.
1. Monetary policy has set principles, but it takes a good policymaker to know how and when to use them. 2. Policy makers may easily make errors since many of their guidelines are unknown, such as potential GDP. 3. Because of expectations a policy may have the opposite effect then that shown by an economic model. 4. Transparency is very desired by the public because they like to better understand why certain actions are being taken and what the future prospects of the economy are. 5. Establishing credibility will allow the central bank to dampen negative effects such as inflation increases.
Discretionary fiscal policy is rendered ineffectual by long adoption times for correcting short term economic fluctuations.
Fed transparency can be used to try and influence expectations, but it may cause undue attention to be paid to inflation at the expense of unemployment.
Monetary policy, while employing models and theorems, has many artistic qualities to it, including large amounts of FOMC discretion in implementing policies.
A “speed limit” policy of looking at growth rates of output, rather than nominal values, helps to increase Fed effectiveness.
A debate rages as to whether policy should be active or passive, but there is no question that economists will shape the debate and its resolution
Anders Engdahl said... 1. Policy makers need to focus on public expectations of what the central bank is going to do. The actions of the central bank will influence the actions of the public. Monetary policy doesn't happen in a vacuum. 2. Policy makers should keep the example of Japan in mind. The so-called liquidity trap can become a huge problem if the interest rates fall to zero. If this happens, it may be beyond the capabilities of monetary policy to rectify the problem. 3. Passive fiscal policy stabilizers act automatically and are a good way for the economy to adjust, an example of these would be increased government spending on unemployment if the economy goes into recession. 4. Policy makers should be mindful of lags, the effects of monetary policy might not be fully felt or fully effective until 18 months after the fact. 5. Monetary policy is an art as well as a science. The effectiveness of experience and leadership cannot be underestimated, the public looks to the fed chair for leadership, and they will base their actions, in part, on the actions of the central bank.
• The Fed’s main goals are to keep inflation low and the real GDP level at potential. • The inside and outside lags impedes Fed’s ability to respond promptly and efficiently to economic shocks. • The lack of accurate timely economic data and the imperfect forecasting models should make economists more cautious in advising policy makers. • A credible Fed can influence people’s expectations and thus reduce the short-run trade-off between inflation and unemployment. • Sometimes, the policymakers need to make decisions based more on their personal judgment than on scientific models.
1. Policy making needs to be handled on a case-by-cases basis using the results of previous action. 2. Because of a time lag, temporary tax cuts may not always swing the economy in the right direction. 3. Finding the output gap is harder than appears, because "potential" output is relative to each economist. 4. Monetary policty is more easily achieved than fiscal policy because it eradicates the lag that exists with getting fiscal policy passed from the congress to the president. 5. Appropriate policy may yield excessive unemployment or inflation, which are trade offs in enacting policy.
1. Because of the time lags associated with discretionary fiscal policy, it is difficult for the government to enact policies to help the economy in the short run. 2. Monetary policy is a mixture between science and art, economists do not know enough yet to make changes to the economy that result in exact outcomes, however there are certain guidelines that they can follow in order to come out with a result similar to what they intended. 3. It is debatable whether or not people are forward looking, depending on the case, this changes the types of policy the U.S. should enact 4. It is difficult to see trends in the economy until after the event, making it difficult to predict what will happen in the future. 5. Economist are unsure if automatic fiscal changes or discretionary fiscal policy changes are better.
1. Automatic stabilizers and monetary policy are the best ways to influence the short-run, due to time lags associated with fiscal policy. 2. Economists have a difficult time discovering changes in the trendline of GDP, and occasionally make poor policy decisions as a result. 3. Transparency in monetary policy-making has advantages and disadvantages, but overall, increasing transparency seems to be a good thing. 4. Monetary policy is both a science and an art; it takes science and numbers to make policies, but since the generation of statistics is imperfect, there is an artistic element necessary as well. 5. Economists’ beliefs differ on the effectiveness of monetary policy; some say it helps offset shocks to the economy, while others believe it causes imbalance in the economy.
1. Before deciding on a strategic change in monetary policy, past policies must be reviewed to take residual effects into account. 2. Monetary policy only allows for controlling inflation and unemployment, but at the cost of sacrificing the other. 3. An effective monetary policy requires policymakers to back up their announcements with measured and deliberate action. 4. In order to control the economy proactively, policymakers should put automatic stabilizers in place to fix the economy before it gets too far from the target. 5. Close monitoring of leading indicators allows the Fed to see the need for policy adjustments ahead of time, and this monitoring can provide early feedback for past policies.
1. Policymakers must understand that trying to stabilize both inflation and output gap can be problematic, thus they must have a clear objective in their decisions. 2. Policymakers should conduct extensive studies to learn which policies worked in which cases in the past, while remembering that each case can have many interpretations. 3. Although it is impossible to predict the future accurately, policymakers must watch the leading indicators closely to learn about the trends in the economy as best as possible. 4. Although monetary policies have an advantage of a shorter inside lag, extremely low interest rates require fiscal policies to solve. 5. Higher transparency keeps policymakers accountable.
1). Automatic Fiscal Stabilizers and Monetary Policy are seen as the best tools for macroeconomic stabilization but are sometimes unable to create the necessary economic outcomes due to policy lags and public expectations.
2). Transparency in monetary policy can be an effective tool to help policy makers get a positive reaction from the public but can only be effective if the public has trust in them.
3). The difficulty in measuring the trend level of output makes it relatively ineffective in comparison to speed limit policies that focus on measuring the change in the output gap.
4). Sometimes Monetary Policy is unable to stimulate the economy and in these situations it is better to simply allow fiscal policy to adjust the economy.
5). The most important tool the Fed can have is their credibility because even with adverse AD shocks, if the Fed has shown that it is dedicated to keeping inflation low, the public will expect future inflation to be low and thus will actually help to stabilize inflation in the long-run.
1.) Good policy choices require a combination of superb judgment, and omnipotent forecasting.
2.) Slowing the economy down may be necessary to keep unemployment and inflation rates at target levels.
3.) A policy maker could have an incredible amount of scientific knowledge of monetary policy, however without good judgment, they might not be successful.
4.) There is a social cost to transparency: The more transparent a central bank is, the more volatile expected inflation will be.
5.) Credibility can be lost if the federal bank goes back on its previous policy goals. This can inversely affect the way the Fed can change expected inflation.
24 comments:
Here are the directions to post your talking points to my blog. First clink on the comments link. Next highlight and copy your talking points. Now come back to the comments page and paste them into the “Leave your comment” window. Just below the “Leave your comment” window choose your identity as “Other” and type your first and last name in the appropriate box (this is how you will get credit for your talking points – note: after the final exam I will delete all comments). If you wish to preview how your talking points will look in the comment section click on the “Preview” button. Use the back button if you wish to further edit your talking points. Once you are happy with the way your talking points will look click the “Publish” button and you are done!
There is currently no way to edit published comments so if you wish to change your talking points you will have to delete your comment and re-post an improved set (only you and I can do this). To delete your comment click on comments, then scroll to the end of your comment and click on the trashcan below and to the left of your comment. Next check the box for "Remove forever?" then click on "Delete Comment." At this point follow the directions in the first paragraph to re-post your talking points as a comment.
I hope this was useful. If you encounter problems posting to the blog please email me (do not be worried if your talking points do not seem to be published immediately as there may be a delay until I manually "re-publish" the entire blog).
1. One of the main problems of monetary policy is the short-run trade off between inflation and employment stability. Performing flexible inflation targeting may help alleviate this problem, which means aiming to stabilize inflation at low level with some weight also on stabilizing output gap.
2. Measuring the output gap is difficult since not all wages and prices are flexible. The solution to this problem is by using the speed limit policies. We should focus on the changes in output gap rather than on its output level. This will improve some measurement problems that affect estimates of the level of gap.
3. Lags between monetary policy actions is another major issue. We can look forward and perform forecast targeting. However, it is difficult to forecast future economic conditions and decide on the appropriate interest rate. It requires good data, good economic models, and good policymakers with good judgments.
4. Management of expectations is crucial for monetary policy. Therefore, the transparency and public understanding of monetary policy increase the effectiveness of monetary policy. Transparency is also important for the credibility of central banks as policymakers maybe inconsistent over time.
5. Liquidity trap is another important issue. It is a situation where the instrument rate is at is minimum, zero, but the real interest rate is still too high. When the interest rate is zero, expansionary monetary policy has practically no effect in bringing the economy back to potential.
1.Monetary policy is neither an art nor a science but a combination of the two. Well-educated economists need a leader in conjunction with models in order to construct an appropriate policy.
2.Finding the actual output gap is near impossible due to the difficulty in determining the level of potential output. In order to refrain from basing a policy on incorrect information, the Fed should look into following a “speed limit policy” and focus on the growth rate of trend output and the growth rate of output.
3.The Fed needs to ensure that there is transparency in their monetary policy. This will only occur if the public is provided identical information as the Fed.
4.Due to the fact that most recessions in the U.S. have been relatively short, policymakers are not able to keep up with the economy’s self-correcting ability. That is, the time it takes for policy makers to devise a policy and to get it approved, the lag-time that has been created allows the economy to recover. Therefore, the policy will be inappropriate for the current state of the economy.
5.In order to devise a fiscal policy for the future, policymakers need to determine how a potential policy will affect the public’s expectations about government spending and changes in taxes in the future.
1.While there are formulaic methods of determining what economic policies to pursue in a given situation, intuition and good judgment are necessary in order to institute these policies effectively.
2.While economists agree that the gap between potential output and actual output is among the best indicators of the economy’s status, a major difficulty of economic policy making can come from the difficulty of accurately measuring this gap.
3.Discretionary fiscal policy can be used as a tool to stabilize the economy in the case of a recession; however, because of the lag from when fiscal policy is recommended to when it affects change, and because of the short duration of most recent recessions in the U.S., unless the recession is extreme to the point where interest rates have dropped to zero many economists see fiscal policy as an inefficient stabilization method.
4.Transparency can help monetary policy to be more effective because if the public is given full disclosure about the objectives of the Fed, they are more likely to act in accordance with the policies being enacted.
5. Much of economics is based on trying to predict the future; economists must try to predict what the economy will do in the near future and pre-empt it with the appropriate actions, and according to the Ricardian equivalence, people regulate their spending habits in accordance with what they predict will be their future economic situation.
1. Because there is a significant time-lag when it comes to applying monetary policy changes, economists must always be forward-looking and make correct forecasts.
2. Although scientific principles provide a generic formula for monetary policy, it also takes good judgment to fine-tune the system.
3. The Fed uses the output gap as a way to determine economic health. Because this is extremely difficult to measure, a speed-limit policy which relies on the rates of growth may sometimes be more appropriate.
4. Although transparency in monetary policy holds policy-makers accountable, it may also risk inflation because it creates expectations.
5. The ultimate challenge of the Fed is to determine an acceptable trade-off between unemployment and inflation.
1. If policy-makers are not consistent with their policies over time, they will lose credibility and the public might disregard their future goals and actions.
2. Under the pure Ricardian view, people base their consumption on what they think the government's future economic decisions will be, and not the current decisions.
3. Even if the goals of the Fed are transparent, the public may not understand the purpose of Fed policies because they don’t have the same level of knowledge and information.
4. Fiscal Discretionary Policy is not always a good way to control the economy because the state of the economy could have changed during the time lag that it takes to enact policy changes.
5. Automatic stabilizers a good example of how passive policies can help adjust the economy.
1. Unlike fiscal policy, monetary policy is implemented immediately however it can take up to eighteen months for changes in the economy to take place.
2. No policy maker is able to see the exact current state of the economy, and as a result, policy makers can only make decisions based on economic forecasts or historical data, which do not allow for a perfect policy decision.
3. Many different schools of economic thought exist, and it is important for all policy makers to understand differing schools of thought as well as be able to defend their chose school of thought.
4. Policy makers must decide which is more important to maintain a prosperous economy, inflation or unemployment; high inflation comes with low unemployment and high unemployment comes with low inflation. It is a tradeoff.
5. Monetary policy is a more potent and effective tool in the short run, but one must remember that neither monetary or fiscal policy will have an effect on long run economic growth.
1. Traditional economic models would suggest that increases in government spending or decreases in taxes would affect the output level, however, this may not be the case because the Ricardian view suggests that consumers should not spend more as an immediate result of a tax cut, which will be “rescheduled” for later.
2. The Lucas critique also claims that traditional economic models do not accurately take into account the impact of policies upon expectations. Instead, it is necessary to take into account other alternative policies which will also affect expectations and behavior.
3. Since measurements are not necessarily accurate and there is a lot of imperfect information at a given time about the output level, economists must be extra cautious when assessing the effects of policies.
4. It is also important to take into account policy lags, such as the inside lag which is the time between a shock to the economy and the policy’s action which responds, as well as the outside lag, which is the time between a policy action and its influence upon the economy. In formulating economic policy, these lags play a crucial role in determining the effectiveness of a policy.
5. The speed limit approach is more telling as it takes into account real activity and the differences in growth rates, which better explain the state of the economy.
1. Good policymaking requires a combination of general principles and good judgement.
2. Transparency regarding objectives, economic conditions and economic models may be beneficial because the public has the right to hold the Fed accountable for policy.
3. Long lags involved in changing fiscal policy make it a less effective tool for correcting recessions than monetary policy.
4. Expansionary fiscal policy may indicate that taxes will rise in the future, which could alter people’s expectations and have a contractionary effect on the economy.
5. Speed Limit policies are an effective way to control people’s expectations.
-Policymakers can make a country’s economy their masterpiece when policy decisions are based on good judgment, good data and good models.
-Greater independency of central banks should come hand in hand with higher transparency in monetary policy.
-The public’s expectations can determine whether the Fed decides to reverse the policy announced causing a general lose of credibility, leaving the Fed with the need of making greater monetary changes in order to control the economy.
-Discretionary fiscal policy comes in handy when monetary policy is unable to get the economy back in track.
-The greatest problem all policymakers face is the insufficient data about the economy’s performance at an exact moment in time.
1. While several principles provide guidance for monetary policymaking, FED still needs its own professional judgment to successfully stabilize our economy.
2. Being an crucial information for monetary policymaker, output gap is yet very difficult to measure.
3. Mistaking the slow down of actual output as a sign of recession instead of a slower potential output growth can lead to an inappropriate monetary policy which would exacerbate the situation.
4. Expansionary policy in form of higher government purchase, associated with a huge budget deficit, can be contractionary.
5. Fiscal policy has a very limited influence on short-lived economic problems as it is always delayed by various administrative procedures.
1. Popular methods of economic forecasting involve econometric models and a composite index of leading economic indicators which include weekly claims for unemployment insurance, the quantity of new building permits issued, and the M2 money supply of the economy.
2. The Fed faces two distinct types of delays before its policies can take effect--an inside lag that is the time between shock and policy action, and an outside lag of around 9-18 months from policy decision to impact on the economy.
3. The advantage of speed limit policies in the Fed is that they avoid the time inconsistency problem: by committing the Fed to altering the rate of change of the output gap, the public has a clear indication that the Fed will remain consistent in its goals.
4. Transparency in monetary policy carries the danger that variation in the Fed's declared economic objectives creates an immediate volatility in the public's expectations of inflation.
5. Monetary policy is as much an art as a science, owing much of its success to prudent choices at critical moments by leading Fed economists.
1. Although policy transparency holds policy-makers accountable for their decisions, it creates a less stable inflation rate because the additional information has a dramatic effect on the public’s inflation expectations.
2. Passive economic policies such as income tax and welfare payments are normally sufficient to stabilize the economy, but in times of prolonged recession, active economic policy can successfully increase output.
3. The inside lag is the main reason monetary policy is preferred over discretionary fiscal policy in combating short run recessions.
4. The theory of time inconsistency implies fixed policy rule is mostly superior to discretionary policy because policy-makers are compelled to follow through on their promises and the public’s inflation expectations remain stable
5. The fact that the output gap is difficult to estimate complicates the process of determining the extent to which monetary policy should be enacted.
1. Monetary policy has set principles, but it takes a good policymaker to know how and when to use them.
2. Policy makers may easily make errors since many of their guidelines are unknown, such as potential GDP.
3. Because of expectations a policy may have the opposite effect then that shown by an economic model.
4. Transparency is very desired by the public because they like to better understand why certain actions are being taken and what the future prospects of the economy are.
5. Establishing credibility will allow the central bank to dampen negative effects such as inflation increases.
Discretionary fiscal policy is rendered ineffectual by long adoption times for correcting short term economic fluctuations.
Fed transparency can be used to try and influence expectations, but it may cause undue attention to be paid to inflation at the expense of unemployment.
Monetary policy, while employing models and theorems, has many artistic qualities to it, including large amounts of FOMC discretion in implementing policies.
A “speed limit” policy of looking at growth rates of output, rather than nominal values, helps to increase Fed effectiveness.
A debate rages as to whether policy should be active or passive, but there is no question that economists will shape the debate and its resolution
Anders Engdahl said...
1. Policy makers need to focus on public expectations of what the central bank is going to do. The actions of the central bank will influence the actions of the public. Monetary policy doesn't happen in a vacuum.
2. Policy makers should keep the example of Japan in mind. The so-called liquidity trap can become a huge problem if the interest rates fall to zero. If this happens, it may be beyond the capabilities of monetary policy to rectify the problem.
3. Passive fiscal policy stabilizers act automatically and are a good way for the economy to adjust, an example of these would be increased government spending on unemployment if the economy goes into recession.
4. Policy makers should be mindful of lags, the effects of monetary policy might not be fully felt or fully effective until 18 months after the fact.
5. Monetary policy is an art as well as a science. The effectiveness of experience and leadership cannot be underestimated, the public looks to the fed chair for leadership, and they will base their actions, in part, on the actions of the central bank.
• The Fed’s main goals are to keep inflation low and the real GDP level at potential.
• The inside and outside lags impedes Fed’s ability to respond promptly and efficiently to economic shocks.
• The lack of accurate timely economic data and the imperfect forecasting models should make economists more cautious in advising policy makers.
• A credible Fed can influence people’s expectations and thus reduce the short-run trade-off between inflation and unemployment.
• Sometimes, the policymakers need to make decisions based more on their personal judgment than on scientific models.
1. Policy making needs to be handled on a case-by-cases basis using the results of previous action.
2. Because of a time lag, temporary tax cuts may not always swing the economy in the right direction.
3. Finding the output gap is harder than appears, because "potential" output is relative to each economist.
4. Monetary policty is more easily achieved than fiscal policy because it eradicates the lag that exists with getting fiscal policy passed from the congress to the president.
5. Appropriate policy may yield excessive unemployment or inflation, which are trade offs in enacting policy.
1. Because of the time lags associated with discretionary fiscal policy, it is difficult for the government to enact policies to help the economy in the short run.
2. Monetary policy is a mixture between science and art, economists do not know enough yet to make changes to the economy that result in exact outcomes, however there are certain guidelines that they can follow in order to come out with a result similar to what they intended.
3. It is debatable whether or not people are forward looking, depending on the case, this changes the types of policy the U.S. should enact
4. It is difficult to see trends in the economy until after the event, making it difficult to predict what will happen in the future.
5. Economist are unsure if automatic fiscal changes or discretionary fiscal policy changes are better.
1. Automatic stabilizers and monetary policy are the best ways to influence the short-run, due to time lags associated with fiscal policy.
2. Economists have a difficult time discovering changes in the trendline of GDP, and occasionally make poor policy decisions as a result.
3. Transparency in monetary policy-making has advantages and disadvantages, but overall, increasing transparency seems to be a good thing.
4. Monetary policy is both a science and an art; it takes science and numbers to make policies, but since the generation of statistics is imperfect, there is an artistic element necessary as well.
5. Economists’ beliefs differ on the effectiveness of monetary policy; some say it helps offset shocks to the economy, while others believe it causes imbalance in the economy.
1. Before deciding on a strategic change in monetary policy, past policies must be reviewed to take residual effects into account.
2. Monetary policy only allows for controlling inflation and unemployment, but at the cost of sacrificing the other.
3. An effective monetary policy requires policymakers to back up their announcements with measured and deliberate action.
4. In order to control the economy proactively, policymakers should put automatic stabilizers in place to fix the economy before it gets too far from the target.
5. Close monitoring of leading indicators allows the Fed to see the need for policy adjustments ahead of time, and this monitoring can provide early feedback for past policies.
1. Policymakers must understand that trying to stabilize both inflation and output gap can be problematic, thus they must have a clear objective in their decisions.
2. Policymakers should conduct extensive studies to learn which policies worked in which cases in the past, while remembering that each case can have many interpretations.
3. Although it is impossible to predict the future accurately, policymakers must watch the leading indicators closely to learn about the trends in the economy as best as possible.
4. Although monetary policies have an advantage of a shorter inside lag, extremely low interest rates require fiscal policies to solve.
5. Higher transparency keeps policymakers accountable.
1). Automatic Fiscal Stabilizers and Monetary Policy are seen as the best tools for macroeconomic stabilization but are sometimes unable to create the necessary economic outcomes due to policy lags and public expectations.
2). Transparency in monetary policy can be an effective tool to help policy makers get a positive reaction from the public but can only be effective if the public has trust in them.
3). The difficulty in measuring the trend level of output makes it relatively ineffective in comparison to speed limit policies that focus on measuring the change in the output gap.
4). Sometimes Monetary Policy is unable to stimulate the economy and in these situations it is better to simply allow fiscal policy to adjust the economy.
5). The most important tool the Fed can have is their credibility because even with adverse AD shocks, if the Fed has shown that it is dedicated to keeping inflation low, the public will expect future inflation to be low and thus will actually help to stabilize inflation in the long-run.
1.) Good policy choices require a combination of superb judgment, and omnipotent forecasting.
2.) Slowing the economy down may be necessary to keep unemployment and inflation rates at target levels.
3.) A policy maker could have an incredible amount of scientific knowledge of monetary policy, however without good judgment, they might not be successful.
4.) There is a social cost to transparency: The more transparent a central bank is, the more volatile expected inflation will be.
5.) Credibility can be lost if the federal bank goes back on its previous policy goals. This can inversely affect the way the Fed can change expected inflation.
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