Fiscal and Monetary Policy, and How They Affect the Economy and You

The key to a smooth running economy is having sound fiscal and monetary policies. We need policies that can be changed over time to better serve our economy as a whole. The United States economy has had its ups and downs, and the economy is definitely in a downward period now, but fiscal and monetary policies can be adjusted to fit what is best for the United States. To really understand the United States economy and understand the issues arising in the news lately, an understanding of the basic concepts behind fiscal and monetary policies is necessary.

Fiscal and Monetary polices are tools that the Federal Reserve Bank, and the government uses to help keep the economy running smoothly. The United States has had periods of hard economic times since the beginning our country’s establishment. The United Stated has had recessions, but our economy has always been able to come back relatively quickly. The Great Depression during the 1930s started as a recession and bank crisis similar to today, but because of an initial lack of government presence the recession evolved to a depression. This was a big turning point of the United States government when they learned that they needed more than just fiscal policies. The United States realized that monetary policies were just as important as fiscal policies. By having both fiscal and monetary policies it would help to prevent another disaster like the Great Depression.

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Revive Lincoln’s Monetary Policy – An Open Letter to President Obama

Dear President Obama:

The world was transfixed on that remarkable day in January when, to poetry, song, and dance, you gazed upon Abraham Lincoln’s likeness at the Lincoln Memorial and searched for wisdom to navigate these difficult times. Indeed, you have so many things in common with that venerable President that one might imagine you were his reincarnation in different dress. You are both thin and wiry, brilliant speakers, appearing on the national stage at pivotal times. Fertile imaginations could envision you coming back dressed in that African heritage you freed, to help heal the great scar of slavery and prove once and for all the proposition that all men are created equal and can achieve great things if given a fighting chance.

As Wordsworth said, however, our birth is but a sleep and a forgetting; and if that is true, you may have forgotten a more subtle form of slavery from which Lincoln tried less successfully to free his countrymen. You may have forgotten it because it has been omitted from our popular history books, leaving Americans ill-equipped to interpret the lessons of our own past. This letter is therefore meant to remind you.

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Uncertainty and monetary policy rules in the United States

“Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape” (Greenspan 2003).

Uncertainty is a central issue in monetary policy, as the quote from Alan Greenspan above illustrates. Empirical models, however, rarely take account of this, effectively assuming that policymakers ignore uncertainty. The evident focus of policymakers on uncertainty suggests that this assumption is invalid and therefore that empirical models of monetary policy must account for uncertainty. This article considers the effects of uncertainty about the true state of the economy on monetary policy, estimating a monetary policy rule that allows for this.

Our empirical model combines elements of Svensson’s (1997) model of inflation forecast targeting with models drawn from the theoretical literature on optimal monetary policy when there is uncertainty about the true state of the economy, most prominently Svensson and Woodford (2003, 2004) and Swanson (2004). In existing models of monetary policy under certainty, monetary policy affects inflation and the output gap directly, so it is optimal for policymakers to use these variables in forming monetary policy. This is the basis for the Taylor rule (Taylor 1993) model of monetary policy and its subsequent refinements (e.g., Woodford 2003).

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