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Syed Ali

This article talks about how monetary policy has changed in the past several years, to deal with the global economic crisis. Before discussing the role of monetary policies, Blanchard first implies that it is important to tie together fiscal and monetary policy, so that they have concerted effects. Otherwise, as we discussed in class, attempts to increase Aggregate Demand via expansionary monetary policy may be subverted by contractionary fiscal policy. Blanchard also mentions the necessity of stabilizing banks; as banks are responsible for lending out money from the Fed-manipulated money supply, they are the key intermediate agents in introducing liquidity and stimulating investment spending in the market. Consequently, stabilizing the banks is an important first step in allowing for economic recovery, as any attempts at monetary policy by the Federal Reserve rely on them.

Blanchard mentions three key changes/discoveries in monetary policy that have resulted from the current financial crisis; “the liquidity trap, the provision of liquidity, and the management of capital flows.” I believe Blanchard is referring to the current reluctance of banks to lend out money, as “the liquidity trap.” Although banks have a minimum reserve ratio they are required to maintain by the Fed, there is no upper limit on how much cash they keep in reserve. Instead of lending out money, banks are instead choosing to store most of their cash as “reserves.” Thus, although the Fed has injected massive amounts of money into the money markets, investment spending has increased only slightly. In turn, the marginal increase in investment spending has had a marginal impact on Aggregate Demand, and we remain in a recessionary gap. Unfortunately, as we discussed in class, there is not a whole lot more the Fed can do to motivate lending by banks, as it has already pushed the real interest rate down to zero. It isn’t possible for the Fed to force banks to lend out their excess reserves in our capitalistic society.

Blanchard mentions how Bernanke and the Fed have tried to circumvent these issues through unconventional monetary policies; for example, by purchasing housing loans directly, in private markets. Overall, while these monetary policies have undoubtedly helped in mitigating the effects of the recession, we still have a long way to go to reach the potential GDP and LRAS. Monetary policy, usually considered the primary response to economic instability, has proven to be only a part of the solution to our current economic crisis.

pj cline

The article starts by pointing out the current argument that the FED should aim for a higher interest rate. Currently the FED aims for 2%, some economists have argued that this is to low and that the FED should aim higher around 6%. The hope is that by doing this the FED would increase domestic demand and allow nominal rates to rise from their current rate at 0%. Interestingly enough by increasing our inflation rates we will also lower our national debt because each dollar will consequently be worth less and hence be less expensive to pay back.

The author also point to the "liquidity trap," I agree with Syed that the author means that banks are not loaning enough money to potential customers. The lending of money is a crucial part to the success of the American economy, which is why the lowering of loaned funds is such a problem. Besides just increasing the inflation rate I believe that the government can offer incentives to banks to do so. Perhaps the government can guarantee certain loans that satisfy a set of criteria that shows that enough of the customers will pay back the loans so that they can still make a profit.

Kasey Canon

Blanchard discusses how monetary policy has changed over the past few years in dealing with the crisis. He also discusses the need for monetary and fiscal policy to work together. The article points out the argument for the FED to increase the inflation rate. By increasing the inflation rate, the FED aims to increase domestic demand. As PJ mentions, an increased interest rate would also lower our national debt.

Blanchard then explains three issues related to monetary policy: "the implications of the liquidity trap, the provision of liquidity, and the management of capital flows." I agree with Syed that Blanchard is referring to the liquidity trap as the reluctance of banks to lend out money. As discussed in class, the FED has done nearly all it can do. Unfortunately, the FED cannot force the banks to lend out more money.

I think Blanchard does an excellent job explaining these three issues and the arguments both for and against possible resolutions.

Matt Kinderman

The extraordinary events of the last 5 years have led to changes in macro thought. There was the Great Depression in the 30’s; however, there was no strong Fed responding to the crisis. The main means of recovery were FDR’s new deal, a massive fiscal expansion. For this economic crisis and recovery on the other hand, we have had the full force of the Fed and international monetary agencies used. The results of these new actions taken are largely uncharted and thus, are currently changing macro policy. IMF Chief Economist Blanchard articulated how macro will never be the same.

He first discusses the liquidity trap. I thought of this from our discussions in class of “if the Fed’s primary method of controlling the economy is my changing interest rates, what happens when interest rates bottom out and cannot go any lower? Blanchard suggest we should try and avoid this in the future, perhaps through keeping inflation higher. Otherwise, the Fed has used quantitative easing to keep lowering interest rates and stimulate the economy. Secondly, Blanchard talks of the necessity of lender of last resort. This is increasing complex in Europe with the Eurozone and particularly weak countries in the EU. Lastly, the last change is letting the exchange rate absorb capital flows, or move more with the economy—something I’m interested in learning more of the particulars of.

Sarah Schaffer

In order to react to the global economic crisis, the monetary policy has changed throughout the previous years. Blanchard emphasizes the importance of fiscal policy in relation to monetary policy. In previous economic crisis Japan did not "pursue countercyclical fiscal policies" which hurt them in their recovery, but the United States did pursue those policies which helped the recovery.
Blanchard continues his article explaining the tree issues relating to monetary policy. Both Syed and Kasey bring up excellent points that Blanchard is referring to the liquidity trap as the banks hesitation to loan money and that the FED cannot force the banks to lend out more money. I think it would be interesting to see if in the future the FED would offer more incentives to the banks to loan out money when the next economic crisis occurs. Blanchard's explanation of way monetary policy has changed and issues that come with it are summarized very well.

Jean Turlington

Monetary policy has played a huge role in the recovery we have been experiencing since the recession. The FED has tried to work very hard to keep the inflation rate steady, while decreasing the unemployment rate. There are always opportunity costs and consequences to what people do to effect the macroeconomy, and we are seeing some of those costs now. One of those is the liquidity trap, right now being at the zero bound in terms of interest rates for quite a while. Larry Summers even thinks that we are going to be there for quite a while into the future. This issue is a serious one, but the things the FED did that lead to this helped recovery.

Another thing discussed is the idea of changes in the exchange rate as a result of monetary policy. I agree with the writer when he says that the first two concerns about changes in the exchange rate are not as relevant. Especially the idea that there will be a change in the inflation rate. If there were going to be an increase in inflation we would definitely seen it by now, but currently the FED is having a hard time reaching its target inflation rate of 2% because of all of the excess reserves banks are keeping. The third argument does have some considerable merit though. But the programs that the FED has in place now and the way that technology has improved these things can be managed to a certain extent. There are capital controls and macro prudential tools now that can limit movements in exchange rate and financial system disruptions. This helps address the third concern about disruptions in the real economy and financial markets. In conclusion there are always opportunity costs to actions by the FED about the economy but I think right now they are headed on the correct track.

Mitchell Brister

This article raises two very good points in my mind. The first, a fact, is that the banks are sitting on too much money. We need businesses to borrow. A possible solution is making an upper limit on bank reserves. The problem with this is that many businesses are sitting on mountains of cash as well. The problem here is that the FED and the government can't make people buy more goods and this is where the fundamental problem lays.

Mitchell Brister

The second point that the article raises is that inflation may not be a bad thing, at least for the short run. As we talked about in class, higher inflation is a great thing for exports as it is cheaper for people in other countries as it is cheaper to buy US. Also as we talked about inflation is a great thing for those in debt. As a country in debt, we may want to look at this option maybe with a higher target inflation rate.

Maddie Kosar

As Kasey and PJ point out, Blanchard suggests that the Fed targets a higher inflation rate so that debts are lowered and we can more easily pay them off. If debt is eliminated or eased somewhat, our MPC can rise because we will be consuming more instead of just paying off debt. This will allow our economy to grow even more. As Mitchell mentions, inflation also helps exporters, which in turn allows GDP to grow. We need businesses to borrow and invest, but with such low profit expectations, they have nearly no incentive to invest. Maybe if inflation was higher, people would spend more and businesses would have the need to grow, but we need to see this put into action without the government raising taxes and essentially canceling out the efforts of the Fed to stimulate consumption.

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