U.S. Monetary Policy

Paper Summary:

This paper examines the effect that the federal monetary policy has had on the American economy. It explains that the marked improvement in the degree of flexibility and resilience exhibited by the American economy in recent years should afford considerable comfort for now. A considerable economics literature in recent years has documented a decline in the volatility of real GDP over the past two decades. The paper concludes that the policy makers should be searching for policies that will further enhance economic flexibility and dismantling policies that contribute to unnecessary rigidity.

From the Paper:

"Monetary policy, unleashed from the constraint of domestic gold convertibility, had allowed a persistent over issuance of money. As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess. But the adverse consequences of excessive money growth for financial stability and economic performance provoked a backlash. Central banks were finally pressed to rein in over issuance of money even at the cost of considerable temporary economic disruption. The Federal Reserve, under the leadership of Paul Volcker and with the support of both the Carter and the Reagan Administrations, dramatically slowed the growth of money."

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