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A model of U.S. monetary policy before and after the great recession



A model of U.S. monetary policy before and after the great recession


According to Andolfatto (2015), people have numerous questions regarding the economic developments that led to the plummeting of the interest rates dramatically in 2008 and consequently the great recession. In his research, Andolfatto (2015) answers these questions from the point of view of a simple dynamic general equilibrium model. The nature of the research is pedagogical in that it entails an overlapping generations model with three assets, that is, bonds, capital and money.

Based on the model utilized by Andolfatto (2015), money is dominated in rate of return, but is held nonetheless so as to fulfill a legal reserve prerequisite. This reserve requirement is legally binding when the nominal interest rate on the bonds supersede the interest paid on money. On the other hand, excess reserves are willing held in situations whereby the nominal interest rates on money and bonds are equated. When the latter situation holds, this state of the economy is referred to as a “liquidity trap.” As a result, open market purchases of bonds tend to have no real or nominal impacts with the exemption of increasing excess reserves in the banking system. Andolfatto (2015) utilizes this model to interpret the impact of open market operations in normal times, that is, periods whereby excess reserves are zero and money is dominated in rate of return. He also uses the model to evince how the Fed loses are crucial to directing control of inflation in a liquidity trap.A model of U.S. monetary policy before and after the great recession

The results of the study show that the comparative statistics of both policy regimes are identical. The only difference exists in whether people want to reckon of monetary policy as allowing the money-to-debt ration to accommodate itself to the chosen rate, targeting an interest rate or choosing the composition of government debt and thus, facilitating the yield on government bonds to clear the bond market. The results can be interpreted to mean that when money is dominated in rate of return, the model produces standard findings in terms of the consequences of monetary policy, that is, actions that impact the policy rate. In addition, in instances whereby shocks drive the economy to a place in the parameter space where the zero lower bound is in effect, Andolfatto (2015) asserts that the model produces classic liquidity trap effects.

When the model is utilized to analyze and interpret the United States macro-economy and monetary policy before and after the 2008 great recession, different results are revealed in terms of the economic actions and consequences of the Fed. For instance, during normal times, that is, when the policy rate issued by the Fed is above the zero lower bound, the Fed are able to control inflation and as a result, countercyclical monetary policy operates using textbook standards. Moreover, in a situation whereby a shock pushes the policy rate to the zero lower bound, the economy tends to enter a liquidity trap scenario whereby open market purchases of government securities bear no nominal or actual impacts except increasing the supply of excess reserves in the banking sector. The point that Andolfatto (2015) puts across from his research is that when the economy is in a liquidity trap, the Fed loses control of inflation, with inflation being determined by fiscal authority in this situation. However, the Fed is not entirely powerless in that it can still lower inflation through selling off enough quantities of its security holdings, as well as, refusing to monetize debt. It is important to note that while the Fed can lower inflation, it is not possible for it to raise inflation in a liquidity trap situation devoid of fiscal accommodation. All it can just do is keep its policy rate as low as possible until the recession is over.

Critique-A model of U.S. monetary policy before and after the great recession

The title of the article is clear, but it is not specific in that it mentions a model of U.S. monetary policy before and after the great recession without stating the specific monetary policy used and discussed by the author.

The abstract is indeed specific and representative of the article. However, after mentioning the model used in the research, it goes straight to the results or findings of the study without giving a succinct explanation of how the model was utilized to attain these results. As such, it falls short of the correct abstract from through the omission of the research methodology.

The author outlines the purpose of the article vividly in the introduction by stating that he would use a simple general equilibrium monetary model to answer questions regarding the 2008 great recession and demonstrate how the Fed loses control of inflation in a liquidity trap economic situation.

Andolfatto (2015) provides a general discussion of the results before distributing the discussion in different categories or sub-headings so as to enable the reader to understand all the processes that lead to the Fed losing control of inflation in a liquidity trap comprehensively. Thus, one can say that the author is objective in his discussion of the topic.

The observations are objective in the various categories that the author talks about them. Nonetheless, I feel that the propositions, observations and calculations lead the reader to different directions and this may render it difficult to connect all these observations and calculations to the conclusion that liquidity trap affects the ability of the Fed to control inflation in the market.

This article relates to the content of the textbook in that it highlights the effects of rates and policies on the stock, money, banks and other financial institutions.A model of U.S. monetary policy before and after the great recession

















Work Cited

Andolfatto, D. (2015). A Model of U.S. Monetary Policy Before and After the Great Recession. Federal Reserve Bank Of St. Louis Review, 97(3), 233-56. doi: 10.20955/r.97.233-56