Teaching macroeconomics: Dilemma of monetary policy

Here’s the predicament that Ms. Yellen and other top policy makers face. The last two U.S. recessions have been caused by the popping of asset bubbles first the stock market in 2000, then housing in 2007.Meanwhile, the mission they are assigned by Congress is to look after the real economy — maximum employment and stable prices, to be precise. But all of their policy tools work through the financial system. They are trying to maintain low unemployment and low inflation, but they do that almost exclusively by buying and selling bonds.  That means that their policies often have a more significant impact and certainly a more immediate and measurable one on the price of, say, junk bonds than they do on job creation and wages.That basic issue is always true, but it has never been more true than lately, with the Fed deeply entwined with unconventional steps to try to boost economic growth, leading to nearly $4.5 trillion in assets ending up on the central bank’s balance sheet.  To some degree, the whole point of that exercise was to drive up the prices of stocks and other assets in order to encourage economic growth. But a key risk all along has been that the efforts would create a rise in asset values to bubble territory without accompanying economic growth.

via Should Janet Yellen Be Giving Us Stock Picks? – NYTimes.com.

About mkevane

Economist at Santa Clara University and Director of Friends of African Village Libraries.
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