What I Learned Wednesday - No Quick Fixes

Posted on 9/30/2009 12:02:00 AM No Comments
Labels: WILW

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The final week of my Money and Banking class was about economic factors and the interest rate target. Not unlike our current predicament, the example mentioned a slumping economy, high unemployment, and the threat of inflation on the horizon. We were to decipher this information and decide whether the target interest rate should be lowered or raised. Here is my response:

This reminds me of a level. We move it a little up and then a little down trying to get the bubble to be in just the right spot, to be level. When the economy slumps the central bank steps in and makes its adjustments in an attempt to inch up the economy. The problem with making an economic adjustment is that the effect of today’s adjustment will not be fully felt for up to twelve months. This [is discussed on page 448 and] is called the transmission lag. So, unlike our level where we see an immediate fix, any change inflicted by the central bank will take some time and will need to consider its future effect.

Inflation is generally thought of as a dirty word, but inflation on a smaller scale can be a good thing. The central bank should look at lowering the nominal interest rate to foster economic growth, stimulate employment, and be mindful of this as the threat of inflation looms on the horizon. The goal is that leveling effect with minor adjustments to correct the balance.

While this was not completely foreign to me, it does clarify a lot. As much as we would like for everything to be all better with a little bailout here and a lot of bailout there it does not seem to work quite that simply. Furthermore, if we make too sharp of an adjustment we will be forever trying to find balance, but actually become more and more unbalanced.

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This reminds me of a level. We move it a little up and then a little down trying to get the bubble to be in just the right spot, to be level. When the economy slumps the central bank steps in and makes its adjustments in an attempt to inch up the economy. The problem with making an economic adjustment is that the effect of today’s adjustment will not be fully felt for up to twelve months. This [is discussed on page 448 and] is called the transmission lag. So, unlike our level where we see an immediate fix, any change inflicted by the central bank will take some time and will need to consider its future effect.

Inflation is generally thought of as a dirty word, but inflation on a smaller scale can be a good thing. The central bank should look at lowering the nominal interest rate to foster economic growth, stimulate employment, and be mindful of this as the threat of inflation looms on the horizon. The goal is that leveling effect with minor adjustments to correct the balance.