Monetary policy: An unfinished revolution

Posted: August 9, 2013 in economy
Tags: , ,

PROGRESS in the practice of monetary policy occurs one disaster at a time. From the depression of the 1930s economists learned that money matters, and that a contraction in the money supply can produce a painful downturn. From the inflation of the 1970s economists learned that inflation is a monetary phenomenon which can be controlled through the proper application of monetary policy. One has the sense that altough the world’s present disaster is coming—slowly, fitfully—to an end, central bankers are still quite a long way away from understanding how they failed and how they might do better in the future. The most recent moves from the Bank of England and the Federal Reserve suggest that this particular revolution remains unfinished.Monetary lessons are never learned quickly—unfortunately, since an earlier understanding of the nature of the disasters might allow policymakers to change course more quickly and prevent a lot of human suffering. Governments began experimenting with reinflation in 1932-33, touching off a proper recovery after four long years of depression, but America blundered back into recession in 1937 after tightening monetary policy once again. Only when monetary policy was entirely subordinated to the war effort was the depression well and truly beaten. And only in the decades after the war would economists begin articulating the connection between …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/08/monetary-policy-0?fsrc=rss

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