Saturday, October 8, 2011

Dual Mandate

It deals with the dual mandate faced by the Federal Reserve. For those of you who are unfamiliar with the term, the Federal Reserve is obliged by law to consider “maximum employment, stable prices, and moderate long-term interest rates.” The kicker is that first part. Many other central banks around the world are focused on stable prices only. This makes sense if you subscribe to the idea that money is neutral and understand the relationship in the equation of exchange M * V = P * Q  (or P * Y as many prefer).

But the author points out that it complicates monetary policy when fiscal policy is ineffective.  I even wonder if fiscal policy-makers are generally unwilling to face hard choices, hoping that monetary policy can solve the problem alone. If true, the tools in the monetary policy toolbox may not offer the solution that is being sought.  This is not the time to use the old adage, “when all you have is hammer, treat everything like a nail.”

I look forward to your comments.

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