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Monetary Policy:
Contemporary
Issues – Pt. II
ECO 473 - Dr. Dennis Foster
W.A. Franke College of Business
The Fed and its Policies
• Has it maintained the value of the dollar?
• Has it stabilized the economy?
• Is it enhancing moral hazard?
• Is it creating distributional problems?
• Is risk of inflation gone?
The Unemployment Rate – 1980-2014
Oct. ‘09 - 10.1%
Dec. ‘82 - 10.8%
June ‘92 - 7.8%
June ‘03 - 6.3%
A Tale of Four Recoveries
+19%
+28%
+16%
+12%
Tracking Prices and Inflation
3rd Q
yr-to-yr
+1.8%
Are Monetary Policies Effective?
• “No” . . .
– Investment channel collapses.
– People are rational and counteract.
– Lag problems.
– It introduces systemic distortions.
• “Yes” . . .
– Various transmission mechanisms.
– Policy is unanticipated.
– Wage & price rigidity.
1920-21:
A Great
Depression
Story
2008
1981
1920
Sept. 5.9%
Rethinking Policy:
The Austrian School of Thought
• Recessions are the solution,
not the problem!
• Keynesian policy -  interest to spending.
• Leads to misallocation of resources.
• Leads to an unsustainable boom.
• Leads to eventual conflict (C vs. I).
• What should we do? Wait!!
GDP (2011) = $18.3 tr. vs. $13.3 tr.
1990 - 2011 net gain = $34.6 tr.
Rothbard - A Return
to Sound Money
Get back on the gold standard.
Define $ in terms of gold.
No more suspensions of payment in gold.
Abolish the Federal Reserve.
Redeem every $ of M1 in gold…
Get government out of money.
Bank notes will replace FRN.
100% reserve ratio
Or, let banks fail.
Abolish FDIC, US Mint.
The Results of Sound Money
1.
2.
3.
4.
5.
No
No
No
No
No
bank panics.
convoluted regulation.
inflation.
discretionary monetary policy.
monetizing of federal gov’t. debt.
6. An end to the business cycle!!
• Let bad firms/banks go bankrupt.
– We don’t lose real resources!!!!!
• Abolish Fannie & Freddie.
• End the Fed.
• End the government monopoly on
money.
Where are we headed?
• Interest rates can’t stay low forever!
Right? Fed is “committed” until 2015.
• Inflation is a looming danger!
Isn’t it? Will it be a surprise? Can it be controlled?
• Unemployment will fall slowly!
Or not. LFPR is down and if …
• Best case scenario?
Economy is sluggish; growth of 2%.
Will recovery last longer than GD?
Get on the mailing list for Spring 2015 – [email protected]
The W.A. Franke College of Business
Northern Arizona University
Spring 2015
ECO 481:
Public Choice Theory
Tue/Thur 9:35 am - 10:50 am
Dr. Dennis Foster
FCB #208
Monetary Policy:
Contemporary
Issues – Pt. II
ECO 473 - Dr. Dennis Foster
W.A. Franke College of Business