Monetary policy essay topics

The Fed reacted to the Great Recession with a large scale increase in the monetary base. This creates expectations ranging from runaway inflation to a concern that a recession will follow. Many have moved to the investing sidelines as a result of the uncertainty. The response to money is more credit at low interest rates. The net outcome depends on whether this stimulus results in real investments that generate income streams that retire the incurred debt. If the real investments do not pay for themselves, there is only short term gain and long term pain.

At the time Friedman and Phelps propounded their ideas, the United States had little experience with sustained inflation. So this was truly a prediction rather than an attempt to explain the past. In the 1970s, however, persistent inflation provided a test of the Friedman-Phelps hypothesis. Sure enough, the historical correlation between inflation and unemployment broke down in just the way Friedman and Phelps had predicted: in the 1970s, as the inflation rate rose into double digits, the unemployment rate was as high or higher than in the stable-price years of the 1950s and 1960s. Inflation was eventually brought under control in the 1980s, but only after a painful period of extremely high unemployment, the worst since the Great Depression.

Monetary policy essay topics

monetary policy essay topics

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