former federal reserve chair ben bernanke B u s i n e s s F i n a n c e

One of the most important topics for this week is the relationship between current account imbalances (particularly trade deficits) and fiscal and monetary policies. After the onset of the Great Recession in December 2007, the United States began a series of fiscal and monetary steps to reduce the severity of the economic downturn. Fiscal policy was exemplified by former President Barak Obama’s $787 billion economic stimulus package, proposed in 2008 and approved by Congress in February, 2009. Although the stimulus package may have helped in the short run, it was monetary policy under former Federal Reserve Chair Ben Bernanke that has received the most attention. The Fed instituted a dramatic period of expansionary monetary policy. Many analysts posit that the resulting record low interest rates had not only positive domestic effects but that the resulting fall in the dollar, hitting record lows in 2008, helped the export sector of the US economy to lead the way out of the recession – slowly – beginning in mid-2009. Although the record levels of ‘quantitative easing’ and resulting very low interest rates have received criticism by some, they have helped maintain the long period of economic growth experienced since 2009. In contrast, during the current economic crisis due to the COVID19 pandemic, the focus has been on fiscal policy. A major reason for this is that the Fed’s options were limited given that interet rates were already very low when the pandemic hit. There is much debate about the relative effectiveness of fiscal versus monetary policies. Much of this revolves around their relative effects on international trade, the rapidity with which they affect the economy, and thier effects on the national debt and inflation.

Please see the readings list in the Resources folder for this week. In addition please look at the main policy effects summarized in Table 11.2 of your text. Since a major part of this course concerns international trade, we will focus on the use of monetary policy. For this Discussion Assignment, please comment on the effects of monetary policy both in terms of domestic economy but also, and especially, for the net export sector. Although it’s tempting to focus on the US, please feel free to comment on the use of monetary policy in the country of your choice either in the last recession (probably easiest) or the current one. Include a comment about the relative strength of the income and exchange rate effects on the current account and how this affects the ability of monetary policy to help economic recovery.