The great recession of 2008 significantly changed the way our economy functions and our methods of controlling it. Justin Wolfer’s discusses how our economy changes since the Federal Reserve decided to introduce trillions of assets into our monetary supply through quantitative easing, this lowered interest rates so low that it put our economy at the “zero bound”.
Changing the interest rate through altering the money supply is the Federal Reserve’s primary controlling and repairing the economy through a process called monetary policy. During economic crises they perform open market purchases, which lowers the interest rate. Since our economy is flooded with money and our interest rate is at the zero bound, monetary policy is rendered almost useless. Wolfer believes that although the federal reserve has recently decided to raise rates, that in the future we will likely return to the zero bound. Two economists, Michael Kiley and John Roberts, ran a simulation replicating the outcome of targeting interests in both the current economy and the old economy which wolf calls “The good old days”. The results showed that the old economy only reached the zero bound two percent of the time, while the new economy hit the zero bound one third of the time. If we return to the zero bound and monetary policy is useless there is another solution, fiscal policy, which is the altering of government spending and taxation. Wolfer uses the example of constructing roads during a recession, which creates jobs and benefits businesses. Fiscal policy is still able to function at the zero bound and is the only other method of battling recessions. While monetary policy is controlled by the federal reserve, fiscal policy is at the hands of politicians which sparks some controversy. If the interest rate continues to rise, monetary policy will gain its effectiveness and we will be able to control our economy using both methods. However, if Wolfer is correct, and we return to the zero bound, we will have no choice but to rely on fiscal policy. https://www.nytimes.com/2017/04/07/upshot/the-economy-may-be-stuck-in-a-near-zero-world.html?_r=0
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