Question

In his speech Monetary Policy and the Dual Mandate, Frederic Mishkin states: “…the level of maximum sustainable employment is not something that can be chosen by the Federal Reserve because no central bank can control the level of real economic activity or employment over the longer run.” What is the reasoning behind this statement? Does it imply that the Federal Reserve has no ability to boost the economy in times of recession?

Answer 1

Monetary policy is good tool for money supply in the economy ,but it can't decide the financial stability of economy alone as it is also work in balance with fiscal policy of government.

It decided money supply in economy by interest rate decrease or increase, but still monetary transmission in the hand of banking system Some time they reaches the benifit of interest rate to the household , business etc.But sometime the monetary transmission take place which help to create jobs, increase demand .all this also depends on behavior of banking system as NPA also a concern for them.

So there are several factor which decide monetary policy role in economic stability like NPA ,consumption pattern in economy, monetary policy transmission, fiscal policy effectiveness.

Federal Reserve has ability to boost demand during period of recession by using cheap money policy along with expansionary fiscal policy of government . But it's is also depends on other factor to reach our the benefits of reduces interest rate as their is a doubt of less return and increase of NPA in the Economy due to increased loan supply.