Kokomo Tribune; Kokomo, Indiana

Columns

September 29, 2013

MICHAEL HICKS: Janet Yellen and the Fed

Federal Reserve is a necessary, yet imperfect, institution.

(Continued)

Among economists there is no real disagreement about the nature of the problem: There is a trade-off between unemployment and inflation. The problem is that the speed and size of this trade-off is very uncertain, and there lies the policy criticism of the Fed.

We know that if the Fed increases the supply of money in circulation, this acts to artificially stimulate the economy, reducing unemployment but risking inflation. We also know that this only works in the short run. Eventually, inflation or even the fear of inflation will slow the economy and reduce employment.

This is a powerful tool, and many argue we should set clear rules that limit human discretion. Others favor thoughtful decision making by an appointed body. Either way, the Fed chair needs to understand the research on these issues. Janet Yellen does.

Michael J. Hicks, Ph.D., is director of the Center for Business and Economic Research and a professor of economics at Ball State University. Contact him at mhicks@bsu.edu.

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