The economic impact from quantitative easing (QE) may be much less than assumed by the Federal Reserve. One focus is on the effectiveness of QE to stabilize a failing banking system, and the judgment here is largely positive. A second focus, especially in the US, is on evaluating subsequent rounds of QE that were implemented after the economy had resumed growth and after the banking sector had recapitalized and returned to profitability. For these subsequent rounds of QE, the reviews are decidedly mixed and heavily dependent on the assumptions embedded in the economic models used by the researchers. Researchers willing to assume that the US is a closed domestic economy tend to find a large impact on long-term interest rates from QE. If the US is part of a highly integrated global economy, a smaller effect is presumed. Then there is the more important and controversial evaluation of whether there is any impact on real GDP growth and job creation from QE once the economy is growing again, even if unemployment rates remain historically elevated. What one chooses to ignore or assume does not exist can be more important to the conclusions of QE evaluations than may meet the eye. Inappropriate assumptions can lead to poor decisions.
Analyzing the economic impact of the COVID‐19 pandemic of 2020 requires an appreciation that price signals were no longer primary determinants of supply and demand. Economic agents were acting out of health fears, government‐mandated shutdown rules, and dealing with financial distress. The economy had entered a state that was far from equilibrium. Orthodox tools, such as comparative equilibrium analysis, can tell one about state “A” and state “B,” but provide no guidance as to how to analyze the phase transition. We turn to the physics of phase transitions to help us understand what essentially was a network collapse. The analysis is extended to examine whether the initial policy responses were more likely to cushion the blow or to accelerate the eventual economic recovery, which is extended into an examination of Modern Monetary Theory. Finally, we study the behavioral changes induced by the pandemic that are likely to be long‐lasting and impact the pace of the recovery. And we note a variety of data anomalies that are sure to vex empirical researchers as they study the pandemic of 2020.
a b s t r a c t JEL classification: E40 E43 E52 E61 Keywords: Dual mandate Federal Reserve Inflation Employment UnemploymentLabor market dynamics in the US are changing due to long-term factors including decelerating labor force growth, rising age of the labor force, and the rapid advance of e-commerce, as well as the one-time downward adjustment during 2009-2013 of the size of state and local government work forces. We discuss some of the controversies revolving around how to analyze labor markets in this dynamic environment from the perspective of monetary policymaking, given the dual mandate of the Federal Reserve to encourage both full employment and price stability. Our statistical research documents the changing association between US unemployment and core inflation. There was a perceived trade-off between inflation and unemployment in the 1950s and 1960s that gave way to stagflation in the 1970s, when both unemployment and inflation were rising. The 1980s were a transition period where the trade-off was perceived to have returned. This trade-off has not been so clear, however, when one looks at the last twenty years. Since 1995, a period of stable and low inflation was consistently observed despite considerable cycles in the unemployment rate. Our theoretical discussion provides a dynamic interpretation of the shifting nature of labor markets, with the objective of pointing the way for future research while highlighting crucial differences in possible interpretations that could fuel debate, both inside and outside the Fed, over how the Fed should manage its dual mandate. The dynamic changes being seen in US labor markets all suggest that the effectiveness of monetary policy to encourage full employment may be vastly overstated. If this interpretation is correct, the Fed may need to reconsider how to manage its dual mandate and react less aggressively to perceived labor slack that may be due to longer-term structural shifts over which the Fed has no influence.
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