325_Supplement13

325_Supplement13 - Department of Economics University of...

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Intermediate Macroeconomic Analysis Spring 2011 1 Department of Economics University of Maryland Economics 325 Intermediate Macroeconomic Analysis Supplement 13 Professor Sanjay Chugh Spring 2011 The following interview with Federal Reserve Bank of Philadelphia President Charles Plosser appeared in the Wall Street Journal on February 12, 2011.
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Intermediate Macroeconomic Analysis Spring 2011 2 THE WEEKEND INTERVIEW FEBRUARY 12, 2011 The Fed's Easy Money Skeptic 'Monetary policy can't retrain people. Monetary policy can't fix those problems.' By MARY ANASTASIA O'GRADY Philadelphia Federal Reserve Chairman Ben Bernanke was on Capitol Hill this week to answer critical questions about monetary policy, amid rising bond yields and sharply higher commodity prices. Mr. Bernanke showed no self-doubt, and Friday's resignation of Fed Governor Kevin Warsh, one of the board's inflation watchdogs, means that Mr. Bernanke's easy-money inclinations will have even fewer internal checks. Enter Charles Plosser, the president of Philadelphia's Federal Reserve bank. A former dean of the William E. Simon School of Business at Rochester University, Mr. Plosser is widely known as an inflation hawk. And this year he has a vote on the Federal Open Market Committee (FOMC), which sets monetary policy. He's now a man to watch. One of the most perplexing questions for the Fed these days concerns the continuation of "QE2," its second round of quantitative easing, which will dump $600 billion in new money into our banking system over the first half of this year. Mr. Plosser doesn't see a deflation risk for the U.S. economy right now. Even those who were worried about deflation six months ago, he says, have begun to change their tune. That means that, with moderate GDP growth and low inflation in the mix, the only thing left as an excuse for QE2 is high unemployment. Can lax monetary policy change that picture? Terry Shoffner
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Intermediate Macroeconomic Analysis Spring 2011 3 Mr. Plosser's answer is unequivocal: This mess was caused by over-investment in housing, and bringing down unemployment will be a gradual process. "You can't change the carpenter into a nurse easily, and you can't change the mortgage broker into a computer expert in a manufacturing plant very easily. Eventually that stuff will sort itself out. People will be retrained and they'll find jobs in other industries. But monetary policy can't retrain people. Monetary policy can't fix those problems."
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This document was uploaded on 11/01/2011 for the course ECON 325 at Maryland.

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325_Supplement13 - Department of Economics University of...

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