Christina Romer, President Obama's chair of the CEA, gave a talk on "Lessons from the Great Depression for Economic Recovery in 2009" yesterday at the Brookings Institution. Drawing upon research on that period, she makes the case that both fiscal policy and monetary policy can be used to help stabilize the current economy. What I found most interesting were her comments on monetary policy:
A second key lesson from the 1930s is that monetary expansion can help to heal an economy even when interest rates are near zero...A key rule of my current job is that I do not comment on Federal Reserve policy. So, let me be very clear – I am not advocating... Tim Geithner should start conducting rogue monetary policy. But the experience of the 1930s does suggest that monetary policy can continue to have an important role to play even when interest rates are low by affecting expectations, and in particular, by preventing expectations of deflation.
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