What You Don't Know Can Hurt You: Knowledge Problems in Monetary Policy

Contemporary Economic Policy, Forthcoming

31 Pages Posted: 7 Mar 2016 Last revised: 17 Jan 2017

See all articles by Alexander William Salter

Alexander William Salter

Texas Tech University - Rawls College of Business; American Institute for Economic Research

Daniel J. Smith

Middle Tennessee State University - Department of Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 16, 2017

Abstract

While the primary causes of the 2007-8 financial crisis are disputed, many economists hold that the monetary policy missteps played a role in causing or prolonging the financial crisis. In light of the perceived failure of monetary orthodoxy, monetary models are being theoretically refined and empirically recalibrated. Absent from these technical debates is a recognition of the immense knowledge burdens inherent in monetary policy. We argue that Fed authorities simply do not, and in all likelihood cannot, have the knowledge required to achieve their own monetary objectives, given their inability to approximately measure or predict changes in the demand for money. Finally, we evaluate the ability of NGDP targeting and free banking to overcome this knowledge problem.

Keywords: Central banking, free banking, Hayek, knowledge problem, monetary policy, NGDP targeting

JEL Classification: E42, E52, E58, E61, P16

Suggested Citation

Salter, Alexander William and Smith, Daniel J., What You Don't Know Can Hurt You: Knowledge Problems in Monetary Policy (January 16, 2017). Contemporary Economic Policy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2741289 or http://dx.doi.org/10.2139/ssrn.2741289

Alexander William Salter (Contact Author)

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States

HOME PAGE: http://awsalter.com

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

Daniel J. Smith

Middle Tennessee State University - Department of Economics and Finance ( email )

MTSU Box 27
1301 E. Main St.
Murfreesboro, TN 37132-0001
United States

HOME PAGE: http://www.danieljosephsmith.com/

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