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.” Does it imply that the Federal Reserve has no ability to boost the economy in times of recession?

Answer 1

And. No!

Because of the following reasons:

1. According to Frederick Mishkin, it is not possible to bring more than the possible rate of potential employment level, as doing so will bring rise in unnecessary inflation, which will lower the confidence level of consumers and this will lead to a cut in spending. A cut in spending will further lead to lower demand, which will finally slow down the economic employment activity from potential to lower level. It will result in loss of revenue for economy.

2. Monetary policy helps to financially stabilize the economy by balancing the rate of interest.

Therefore, Any central bank has to keep the market going at natural rate of unemployment.

3. Federal system has the potential to balance the market employment, but for any such shocks such as Covid-19, every country is helpless.

So it is difficult for even central bank to overcome such situation of unemployment with increasing inflation.

4. In long run, employment can increase or decrease, depending upon level of population, demand, govt. Policy.

5. Hence by the prof. frederik M., Federal reserve can try to boost employment level to the close of potential level.

And during Recession government can adopt an expansionary policy to boost the demand and there by prices of products, which will bring back economy to normal level.