WHAT YOU DON'T KNOW CAN HURT YOU: KNOWLEDGE PROBLEMS IN MONETARY POLICY

Many economists hold that monetary policy missteps played a role in causing or prolonging the 2007–2008 financial crisis. In light of the perceived failure of monetary orthodoxy, models are being theoretically refined and empirically recalibrated. Absent from these technical debates is a recognition...

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Bibliographic Details
Published in:Contemporary economic policy 2017-07, Vol.35 (3), p.505-517
Main Authors: Salter, Alexander W., Smith, Daniel J.
Format: Article
Language:English
Subjects:
Analysis
Banking
Economic crisis
Economic models
Economists
Knowledge
Monetary policy
Money
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Summary:Many economists hold that monetary policy missteps played a role in causing or prolonging the 2007–2008 financial crisis. In light of the perceived failure of monetary orthodoxy, models are being theoretically refined and empirically recalibrated. Absent from these technical debates is a recognition of the immense knowledge burdens inherent in monetary policy. We argue that Fed authorities do not have the knowledge required to achieve their own monetary objectives, given their inability to approximately measure or predict changes in the demand for money. Finally, we evaluate the ability of free banking to overcome this knowledge problem. (JEL E42, E52, E58, E61, P16)
ISSN:1074-3529
1465-7287
DOI:10.1111/coep.12219