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

13 Pages Posted: 30 May 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

Political Economy Research Institute and Department of Economics and Finance at Middle Tennessee State University

Multiple version iconThere are 2 versions of this paper

Date Written: July 2017

Abstract

Many economists hold that monetary policy missteps played a role in causing or prolonging the 2007–2008 financial crisis. In light of the perceived failure of monetary orthodoxy, 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 do not 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 free banking to overcome this knowledge problem.

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 (July 2017). Contemporary Economic Policy, Vol. 35, Issue 3, pp. 505-517, 2017. Available at SSRN: https://ssrn.com/abstract=2976574 or http://dx.doi.org/10.1111/coep.12219

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

Political Economy Research Institute and Department of Economics and Finance at Middle Tennessee State University ( email )

MTSU Box 190
1301 E. Main St.
Murfreesboro, TN 37132-0001
United States

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

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