ECO202ec - PRO INDEPENDENT FED-If Fed was not politically...

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PRO INDEPENDENT FED -If Fed was not politically independent it would be subjected to political pressures which would impart an inflationary bias to monetary policy. -Politicians in democratic society are concerned most with winning their next election and holding office. This suggests that if the Fed were not politically independent it’s focus would be shortsighted: more of the Fed’s concern, thought, and action would be focused on short-run goals instead of long-term goals, such as promoting a stable price level. -They will seek short-run solutions to problems, such as high unemployment and high interest rates, in order to remain popular with the uneducated, even if the short-run solutions have undesirable long-run consequences. -Long-run consequences of this shortsightedness include decrease in national spending and economic stimulation(effectively slowing our economy), high inflation, and high interest rates. -Federal Reserve under the control of Congress or the president would be more likely to pursue a policy of excessive money growth when interest rates are high, even though it would eventually lead to inflation and even higher interest rates in the future -Independent Fed is a defender of a sound dollar and a stable price level. -The existence of the American political business cycle would cause interest rates and money supply to increase just before elections and the long-term effects of these careless actions would be left to be dealt with later. This cycle would increase in visibility and its adverse affect on the U.S. economy would grow with time as politicians attempt to outdo past attempts to lower interest rates and unemployment (goals of the incumbent in the political business cycle). -President-controlled Fed could be used to facilitate Treasury financing of large budget deficits by its purchases of Treasury bonds. Treasury pressure on the Fed to "help out" might lead to more inflation in the economy. An independent Fed is better able to resist this pressure from the Treasury. -Politicians have fewer incentives to work for the people of the U.S. than the Fed. (control of monetary policy is too important to leave to politicians, a group that has repeatedly demonstrated a lack of expertise at making hard decisions on issues of great economic importance, such as reducing the budget deficit or reforming the banking system.) --Recent research seems to support this conjecture: When central banks are ranked from least
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ECO202ec - PRO INDEPENDENT FED-If Fed was not politically...

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