Furthermore, the effects of monetary policy tend to be spread less evenly across the economy than those of fiscal policy.
One school of thought is that a high unemployment rate is structural and immune to the stimulative effects of monetary policy.
Then there is the Fed and the effects of its monetary policy.
If workers and businesses anticipate the effects of monetary and fiscal policy, they will not change their economic behavior.
FORBES: Thomas Sargent, Rational Expectations And The Keynesian Consensus
Indeed, speculative excesses in asset prices and credit flows might occur more frequently in future, thanks to the combined effects of financial liberalisation and a monetary-policy framework that concentrates on inflation but places no constraint on credit growth.
The benefits of tight monetary policy are more doubtful, and the damaging side-effects of depreciation less severe.
Without attention to the dynamic effects of their actions, central bankers risk leaving monetary policy too loose or too tight for too long.
If it does nothing, the Fed runs the risk that, when Wall Street does eventually fall, inflation will be rising and the dollar falling, making it harder to ease monetary policy to offset the effects of a crash.
The Fed had been easing its monetary policy to counteract the deflationary effects of the subprime crisis.
But Mr King added that no monetary policy could prevent the current effects of rising food and energy prices on living standards.
"At the root of the euro upheaval is a balance of payment crisis caused by the cumulative effects of a 13-year-old one-size-fits-all monetary policy and a fixed exchange rate for a collection of disparate countries in very different stages of economic and structural development, " he argues.
This has weakened the power of monetary policy for each nation and has given rise to large spillover effects.
Keep in mind that, as it stands, Cyprus is suffering deflationary effects, bank closure costs, capital controls, yet without getting the redenomination benefits and independent monetary policy benefits of leaving the euro.
FORBES: Links 17 March: Cyprus Bailout And Predictions Of Disaster
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