Wednesday, June 22, 2011

Time to update the macro textbooks

Monetary policy has completely changed since 2008, argues John Williams, CEO of the San Francisco branch of the Federal Reserve, in a recent speech (thanks to Craig Newmark's blog for making me aware of this item).  So maybe we need to change the way we teach monetary policy in macro classes? 

I stand guilty as charged in my Global Econ for Managers class.  We use a well respected but now outdated text by Harvard professor David Moss.  According to Moss (and repeated in my lecture notes), the Fed has three tools it can use to influence the economy: open market operations (buying or selling Treasury bonds to create or withhold liquidity in the banking system), reserve requirements, and the discount rate charged to banks who borrow from the Fed.  Williams explains how this has completely changed because of technology (not that many people holding cash these days for transactions) and the challenges posed by the financial crisis.  Well worth reading.

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