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Business Economics

, Volume 44, Issue 2, pp 73–79 | Cite as

A Two-Headed Dragon for Monetary Policy

  • James Bullard
Article
  • 9 Downloads

Abstract

The current financial crisis has been the key global economic event since it unfolded in earnest in early August 2007. The Federal Reserve has taken aggressive actions—both conventional and unconventional—to counteract the economic and financial fallout. Among these actions have been a number of new special lending programs created under section 13(3) of the Federal Reserve Act, which had not been employed since the 1930s. Academics, policymakers, and the general public have shown great interest in the Federal Reserve's new programs. In this paper, I emphasize two medium-term risks that the Federal Reserve now faces as it continues to confront financial market turmoil and recession. The two medium-term risks are opposites of each other, a “two-headed dragon.” One is a Japanese-style deflation trap, and the other is a breakout of inflation like that seen during the 1970s. An explicit inflation target would help mitigate these very real risks.

Keywords

monetary policy reserve balances quantitative easing 

Notes

Acknowledgements

I appreciate assistance and comments provided by my colleagues at the Federal Reserve Bank of St. Louis. Kevin Kliesen, associate economist, and Marcela M. Williams, special research assistant to the president, provided assistance.

The authors are employees of the US Government and this contribution was prepared as a part of their duties, consequently copyright in the text of this article resides with the US Government.

References

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  2. Benhabib, Jess., Schmitt-Grohe, Stephanie., and Martin, Uribe. 2001. “Monetary Policy and Multiple Equilibria.” American Economic Review, Vol. 91 (March), pp. 167–186.CrossRefGoogle Scholar
  3. Federal Reserve Bank of St. Louis, 2005. “Reflections on Monetary Policy 25 Years After October 1979.” Review, Vol. 87 (2, Part 2): 137–358.Google Scholar
  4. Federal Reserve Bank of St. Louis, current. “The Financial Crisis.” www.stlouisfed.org/timeline/default.cfm.
  5. FOMC Press Release, 2008. “FOMC Statement and Board Approval of Discount Rate Requests of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco,” December 16.Google Scholar

Copyright information

© Palgrave Macmillan 2009

Authors and Affiliations

  • James Bullard

There are no affiliations available

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