What You Don't Know Can Hurt You: Knowledge Problems in Monetary Policy
13 Pages Posted: 30 May 2017
Date Written: July 2017
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: Suggested Citation