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Unformatted text preview: >> “GGRESSIVE MONETARY POLICY,” declared the 2004 Economic Re- port of the President , “can reduce the depth of a recession.” Few modern macroeconomists would disagree. There are many public arguments about macroeco- nomic policy—arguments that can play a central role in political campaigns. But there is a broad consensus among macro- economists about how the economy works. The view that expansionary monetary pol- icy can be effective in fighting recessions is part of that consensus. And that consensus is reflected in actual policy: as the two pan- els of the accompanying figure show, mon- etary policy responded very aggressively to the 2001 recession. PURGE THE ROTTENNESS? What you will learn in this chapter: Why classical macroeconomics wasn’t adequate for the problems posed by the Great Depression The core ideas of Keynesian eco- nomics How challenges led to a revision of Keynesian ideas The ideas behind new classical macroeconomics The elements of the modern con- sensus, and the main remaining disputes A chapter 415 17 The Making of Modern Macroeconomics Yet today’s consensus about monetary policy didn’t always exist. There was a time when many economists opposed any effort to fight recessions. At the beginning of the Great Depression, Herbert Hoover’s secre- tary of the treasury, Andrew Mellon, was firmly opposed to any monetary expansion. Hoover would later claim that Mellon’s ad- vice was to let the slump take its course: “It will purge the rottenness out of the sys- tem.” This advice reflected the views of many eminent economists of the day, who regarded aggressive monetary policy as dangerous and ineffective. When Franklin Roosevelt, Hoover’s suc- cessor, took office, there was an intense de- bate among his advisers about whether to Money supply (M1, billions of dollars) Year $1,400 1,300 1,200 1,100 1,000 1 9 9 6 1 9 9 9 2 1 2 2 2 5 (a) The Money Supply Rose Sharply in Response to the 2001 Recession… Federal funds rate Year 8% 6 4 2 1 9 9 6 1 9 9 9 2 1 2 2 2 5 (b) …While the Federal Fund Rate Fell Sharply. 2001 Recession 2001 Recession The Fed responded to the 2001 recession, indicated by the shaded area in both panels, with a rapid expansion of the money supply (panel a) and sharp cuts in the Federal funds rate (panel b). Source: Federal Reserve Bank of St. Louis; National Bureau of Economic Research. 416 PA R T 7 EVENTS AND IDEAS UNCORRECTED Preliminary Edition Classical Macroeonomics The term macroeconomics appears to have been coined in 1933 by the Norwegian econ- omist Ragnar Frisch; the date, during the worst year of the Great Depression, is no ac- cident. Still, there were economists analyzing what we now consider macroeconomic issues—the behavior of the aggregate price level and aggregate output—before then....
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This note was uploaded on 03/18/2009 for the course ECON 102 taught by Professor Erus during the Spring '09 term at Boğaziçi University.
- Spring '09
- Monetary Policy