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In his article, Monetary Policy in the 20082009 Recession, Hetzel addresses the primary monetary policy issue during economic recessions. In my opinion, this issue is very interesting and important for both professionals and common people. Economic recessions and monetary policy make influence on people of all countries. Therefore, the monetary policy question is always significant.
The monetary policy question during recessions is also challenging for economists. It is necessary to build monetary policy wisely to cope with the problems of recession and help the economy develop. Monetary policy plays a vital role in economy.
Economists consider monetary policy very important for the defense against economic recession. In comparison with fiscal policy, monetary policy enables the Federal Reserve to act faster than the administration or Congress and to judge better the appropriate period and power of a stimulus. Because most recessions in business activity last for several quarters, the timeliness of the policy response is vitally important (Economic Stimulus: What Is the Role of Monetary Policy, n.d.).
Hetzel (2009) uses the data concerning behavior of real (inflation-adjusted) bank loans in recessions; the source of this data is Board of Governors 2009a:
Figure 1, which shows the behavior of real (inflation-adjusted) bank loans in recessions, reveals that bank lending behaved similarly in this recession to other post-war recessions. Moreover, the fact that bank lending rose in the severe 19811982 recession and often recovered only after cyclical troughs suggests that bank lending is not a reliable tool for the management of aggregate demand.
Here, quantitative research method is used. In addition, the following data is analyzed:
. . . the increase in energy and food prices had significantly increased headline inflation. The numbers available at the meeting showed three-month headline consumer price index (CPI) inflation ending in June 2008 at 7.9 percent with 12-month inflation at 5.0 percent. The corresponding core (ex food and energy) CPI figures were, respectively, 2.5 percent and 2.4 percent. (Hetzel, 2009)
This data is retrieved from the Wall Street Journal, and the original source was the information from August FOMC meeting. There, quantitative and qualitative research methods are combined.
Among other research methods being used is a book study and analysis. Hetzel observed the books and articles on economics by different authors, including Milton Friedman, John Keynes, Robert Lucas, and others.
The paper is strongly related to macroeconomics. It studies relationships between monetary policy and economic state of the country. The main focus is the monetary policy during recession in 2008. The author studies the monetary policy of this period and its efficiency:
The absence of a funds rate reduction between April 30, 2008, and October 8, 2008 (or only a quarter-percentage-point reduction between March 18, 2008, and October 8, 2008), despite deterioration in economic activity, represented a contractionary departure from the policy of LAW with credibility. From mid-March 2008 through mid-September 2008, M2 barely rose while bank credit fell somewhat (Board of Governors 2009a). Moreover, the FOMC effectively tightened monetary policy in June by pushing up the expected path of the federal funds rate through the hawkish statements of its members. In May 2008, federal funds futures had been predicting a basically unchanged funds rate at 2 percent for the remainder of 2008. However, by June 18, futures markets predicted a funds rate of 2.5 percent for November 2008. (Hetzel, 2009)
In addition, Hetzel explores theoretical approaches to monetary policy. He divides explanations for cyclical fluctuations of business activity to two types. The first one includes explanations when real forces negotiate the activity of price system. Regarding credit cycle, so-called psychological factors, theory of the economic, optimism waves are exchanged with the waves of despondency. Such turns in the investors psychology negotiate the stabilization of price system. The inability of effectively allocating resources by price system, either within markets or in a period, produces the underemployment equilibrium where the real output is adjusted but not prices. The model of Keynes proved that, during economic downturns, deficit spending of the government that multiplier expands creates the distinction between real spending of people and the full employment. Monetary policy was weak because people and banks would simply adjust to the balances of money that appeared due to open market purchases of the Central Bank (so-called liquidity trap) (Hetzel, 2009).
Hetzel studies the quantity theory of Milton Friedman. The core of the quantity theory is the nominal or real distinction caused by the assumption that the persons welfare depends only from real variables (relative prices and physical quantities). The Central Bank is unable to exercise systematic and predictable control over real variables. However, monetary instability, which Friedman measured with the help of fluctuations in the money stock in relation to steady growth, destabilizes real output (Hetzel, 2009).
Hetzel (2009) also explores the macroeconomic issues that occurred during the Great Depression and outlines the lessons that could be studied from it:
In the Depression, the government ran policies for intervening in credit markets, for instance, by using the Reconstruction Finance Corporation (RFC) to recapitalize banks. The resulting independence of money-creation and credit-channel policies makes the Depression a laboratory for evaluating the usefulness of these different policies for macroeconomic stabilization.
Causal relations are studied in the paper: Financial Times columnist Martin Wolf (2008) wrote about the origins of the crisis in the collapse of an asset price bubble and consequent disintegration of the credit mechanism . . . (Hetzel, 2009). This view demonstrates a structural break of bank lending behavior during recessions: during the recession of 2008-2009, bank lending should have diminished more powerfully than during the past recessions. However, Hetzel studies data from Board of Governors 2009a and reveals that the behavior of real (inflation-adjusted) bank loans during recession of 2008-2009 is similar to other recessions that occurred after war. In addition, bank lending rose during the severe 19811982 recession and often recovered only after cyclical troughs. Therefore, Hetzel (2009) proves that bank lending is not a reliable mechanism for managing aggregate demand.
I am convinced about the findings of this article. I consider it very interesting and useful because it provides a broad study in monetary policy aspect during economic recessions; the strongest one is its historical study. It is helpful in understanding causes and relationships in macroeconomics. However, I consider some aspects of the article weak. In the article, only the U.S. monetary policy is studied. Certainly, its historical changes are well studied; however, some questions remain closed. In my opinion, other countries monetary policy observation would be a good extension to the work. Monetary policy can be very different depending on the economic and political state of a country. It would be interesting to study monetary policy of foreign countries and use their experience.