1Monetary Policy and the Fed The FedStructure, independence, goals, tools, reserves and money creationBalance SheetConspiracy and other Views1Monetary PolicyFed-> Reserves/Ms->r->I,C,NX,D->y,pAlso $, Tobin’s q, asst pricesCan’t push on a string -Liquidity TrapCrisis PoliciesQuantitative easingIn the News?2Course IssuesOnline Midterm –Tuesday 3/8 6pm –Thurs 3/10 6pmExtra CreditStop in some time (resume)Midterm Review Questions (Resources)3ODESlides per page(blogs)
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2FOMC Statement 1/26/2011…economic recovery is continuing, though …(to slow)…household spending picked up..constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, …investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent4Role of Fiscal Policy – 2002 WalshRecession 2001Use is unusual – why?Automatic Stabilizers - tax, spendingState & local pro cyclicalLags (avg recession 11 mos)5implementation - longimpactFiscal Policy 2009 LeducMonetary Policy First – Why?But – zero lower bound/liquidity trap/can’t push on a stringTh6TheoryMultipliers G>T Depend on expectations, impact on I, NX, other injections/leakages