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Monetary Policy

Can monetary policy save the economy?

In rarefied economic circles, that’s a hotly debated question. On one side you’ll find a group of economists — call them “monetarists” — who think that the Federal Reserve has enough tools to pull us out of the recession. Lined up on the other side are Keynesian economists, who contend that monetary policy alone falls short; Congress and the president need to employ fiscal stimulus (i.e., spend billions and billions of dollars) to get the economy moving again.

Monetarists such as Tyler Cowen and Scott Sumner argue that given time, creative monetary policy will work — and that most other government meddling is likely a waste of money. But the Keynesians, notably Paul Krugman and Brad DeLong, point out that the federal funds rate — the Fed’s primary monetary tool — is already close to zero and other monetary strategies are of dubious value. To dive into the debate, follow the links below.

Editor's Pick

  • Deflation: Should We Worry?

    An extended drop in the price of goods and services is called deflation. It often happens during a recession, and it can hurt the economy further. MoneyWatch.com's Jill Schlesinger explains.

  • Did We Just Waste $787 Billion?

    Monetarist economist Garett Jones and Keynesian Menzie Chinn debate whether Obama’s stimulus plan has a prayer of ever working.

  • The Real Lesson of the Great Depression

    We spent our way back to prosperity, right? Nope, says Tyler Cowen. Sound monetary policies played a large and underappreciated role in ending the Depression.

  • How Spending Will Save Us

    A massive fiscal stimulus did bring us out of the Depression, writes Paul Krugman. But this time around, the monetary tools are tapped out and the fiscal stimulus isn’t up to the task.

  • I Beg to Differ, Mr. Krugman

    In an open letter to Paul Krugman, economist Scott Sumner makes the case for creative monetary policies rather than fiscal stimulus.

  • In Bernanke We Trust

    A federal funds rate of zero is no problem according to University of Chicago economics professor Robert Lucas, who says the Fed can still stimulate spending plenty.

Sort By

  • The Fed's Monetary Policy Has Veered Off Course

    Although the risk of deflation has receded in recent months, Fed policy is still too contractionary for the needs of the economy, as the money supply has not kept up with increases in money demand. Two percent inflation is the goal Both Lee Ohanian and I have published papers arguing that,...

    Blog posts | Jun 30, 2009

  • Deflation is Our Biggest Worry -- Not Inflation

    Many economists are worried about high inflation over the next few years. This is based on a misdiagnosis of the current economic crisis. Although the recession officially began in December 2007, until last August the damage was mostly confined to housing and finance. In August 2008, the...

    Blog posts | Jun 26, 2009

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