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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Taking stock: monetary policy transmission to equity markets.(analysis)

ONE CENTRAL ARGUMENT of James Tobin’s seminal 1969 Journal of Money, Credit and Banking paper was that “financial policies” can play a crucial role in altering what later became known as Tobin’s q, the market value of a firm’s assets relative to their replacement costs. Tobin emphasized that, in particular, monetary policy can change this ratio. This 1969 JMCB paper together with another of his contributions (Tobin 1978) became a key element in the formulation and understanding of the stock market channel of monetary policy transmission. Tobin’s argument in this work was that a tightening of monetary policy, which may result from an increase in inflation, lowers the present value of future earning flows and hence depresses equity markets.

The second part of Tobin’s argument, namely the relationship between monetary policy and equity prices, is still not very well understood. On the one hand, it has proven difficult to properly identify monetary policy, since monetary policy may be endogenous in that central banks might react to developments in stock markets. Considerable progress has recently been made in this respect. Rigobon and Sack (2002, 2003) develop a methodology that exploits the heteroskedasticity present in financial markets to identify monetary policy shocks, while Kuttner (2001) and Bernanke and Kuttner (2003) derive monetary policy shocks through measures of market expectations obtained from federal funds futures contracts. In this paper, we will employ a methodology similar to Bernanke and Kuttner (2003), by identifying monetary policy shocks through market expectations obtained from surveys of market participants.

» Read more: Taking stock: monetary policy transmission to equity markets.(analysis)

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