U.S. Monetary Policy

In order to discuss how monetary policy should be conducted in the U.S. it is first necessary to briefly summarize the unique power of the Federal Reserve and policy prescriptions suggested by alternative schools of thought. The foundation of the power of the Federal Reserve comes from its unique role in controlling the nation's supply of "base money;" the sum total of the currency in the hands of the public and the reserves that banks are legally required to hold to bank their deposits. Banks can withdraw their reserves in the form of cash, or deposit cash with the Fed to add to their reserves. But the total quantity of base money cannot be changed except by the Fed's action. (Woolley, 1984)

By injection or withdrawing base money from the system the Fed has immense influence over the economy. If the Fed puts more cash in - which it usually does by buying U.S. government debt from a select group of commercial banks. These banks then find themselves with more reserves than they are legally required to hold. They can then choose (although they don't have to) to lend out the excess, expanding credit and driving down interest rates. Furthermore, most of the money they lend out ends up being deposited back in the banking system, allowing a second wave of lending, a third and so on. The result is the Fed's injection of base money supposedly has a multiplier effect, expanding credit throughout the economy. The rise in credit and the fall in interest rates in turn, stimulate

Related Essays

US FEDERAL RESERVE MONETARY POLICY US FEDERAL RESERVE MONETARY POLICY Characterization of the State of the Economy The Board of Governors of Federal Reserve (2004), in the most recent Monetary .... (678 3 )

Monetary Policy .... central bank. In the United States, monetary policy is determined by the US central bank called the Federal Reserve Board. The goals .... (852 3 )

Monetary Policy .... Trust us. A rules based monetary policy requires statistical models that quantify key macroeconomic relationships. These models exist. .... (1214 5 )

Monetary Policy and Nike .... the US dollar and foreign currencies in the foreign exchange marketplace Can bring about government impact to the economy by determining monetary policy and .... (835 3 )

Monetary Policy, Fiscal Policy & Supply & Demand .... to acceptable levels and stabilize the exchange rate between the US dollar and foreign currencies in the foreign exchange marketplace. Monetary policy is one .... (844 3 )

not to accommodating inflation could be made credible to the public. Tie the Fed's hands with monetary targets or with a gold standard - and what will automatically follow are stable prices and a minimal chance of recession (Lucas, 1981). Further to the left, both Keynesians and Post-Keynesians have argued that fiscal variables can be used to stabilize the economy and monetary policy should fall in line with whatever appropriate fiscal measures are dictated and by the Congressional and Executive branches. This usually means the redirection of monetary policy from fighting inflation to promoting growth. This argument has become particularly prominent in the past few years as the American economy has suffered through a recession (Sinai, 1992). This policy option would again take much of the discretionary power of the Fed away and transfer it to the controllers of fiscal policy. My policy prescription for the Federal Reserve follows from the dictates of the gold standard. I would raise the issue of whether it is pure coincident that the great inflation of the 1970s had followed the abrogation of the gold-exchange standard culminating in 1971? For the century preceding World War I, prices and interest rates had been remarkab

Category: Economics - U