December, 2016

Monetary Policy After the Crisis and Alternative Systems for Macroeconomic Stability

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This policy essay examines how the Federal Reserve’s monetary policy contributed to the most recent financial crisis of 2007–2008 and how policy decisions since the aftermath of the crisis may be encouraging further monetary distortions. Viewed through the lens of the Mises-Hayek business cycle theory, the Federal Reserve may be again undertaking actions that could cause unsustainable misallocation of resources or, at the very least, distortions in critical price signals. This paper concludes by considering alternative institutions and policies that might replace our current discretionary monetary regime. A free-banking system, it argues, would harness the power of the market process to prevent future imbalances by using microeconomic incentives that result in macroeconomic stability.