Download American Economic Policy in the 1990s by Jeffrey A. Frankel, Peter R. Orszag PDF

By Jeffrey A. Frankel, Peter R. Orszag

An exam of U.S. fiscal coverage within the Nineties, via top coverage makers in addition to educational economists.

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Extra resources for American Economic Policy in the 1990s

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In essence, interest rates are the price of money. The central bank affects the price of money by controlling the quantity of money. As a first approximation, the central bank’s only policy lever is the supply of high-powered money (currency plus bank reserves), which it controls through open-market operations and, to a lesser extent, lending at its discount window. It can use this single lever to target a broad monetary aggregate, such as M1 or M2, an interest rate, an exchange rate, or the price of bananas.

Returns were high, and volatility was low. There was never a better time to be in the market. To a large extent, the performance of the stock market is just a reflection of the macroeconomic events we have already seen in other statistics. Low volatility in the stock market reflects low volatility in the overall economy. The high return reflects the surprising acceleration in productivity growth, which helped 3. Some of these ideas are explored in a recent paper by Laurence Ball and Robert Moffitt (2001).

Without inflation, the real wage will be stuck above the equilibrium level, resulting in higher unemployment. For this reason, some economists argue that inflation ‘‘greases the wheels’’ of labor markets. Only a little inflation is needed: An inflation rate of 2 percent lets real wages fall by 2 percent per year, or 20 percent per decade, without cuts in nominal wages. Such automatic reductions in real wages are impossible with zero inflation. S. monetary policy in the 1990s. Once again, Lawrence Summers endorsed this view at the beginning of the decade when he proposed a target rate of inflation of 2 to 3 percent.

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