Should the Federal Reserve Play Mind Games to Stimulate the Economy?

The Federal Reserve has two jobs: maintain the value of the dollar and maximize employment.  In a very interesting article from the <a href = "http://www.nytimes.com/2015/03/01/magazine/in-greenbacks-we-trust.html?ref=economy&_r=0">NY Times</a> , the author Adam Davidson points out that Janet Yellen, who is currently in charge of setting the interest rates at the Reserve, has been maintaining the dollars’ value so well that it is actually impeding the development of new jobs.  US citizens have become so comfortable in the stable value of their money that they are less likely to take the risks that coincide with the creation of jobs such as entrepreneurship and venture capitalism.  Adam Posen, the man who once set the interest rates for the Bank of England, stated that if Janet Yellen were to simply suggest that the long run interest levels may be higher than previously considered acceptable she might scare people into investing their money in riskier ways to ensure they can beat the inflation curve, thereby creating more jobs.  

Giffen goods, items that result in a rightward shift in demand as the price increases, were mentioned in an earlier post.  My understanding of Giffen goods in lay-mans terms is that they are items that people are willing to pay or do more to obtain as the price increases.  Giffen goods tend to be durable commodities, items that we use regularly that can be bought in advance and saved for later.  Based on the information above, would it be appropriate to categorize the US dollar itself as a Giffen good?  As interest rates rise, the cost of each dollar also rises.  To offset its devaluation, people want more dollars and more willing to take part in riskier investments to gain them. 

I would like to know your thoughts on whether the Giffen good concept applies to the US dollar and whether you think the suggestion made by Adam Posen is a good idea.

1 comment:

Lacey said...


Sorry I couldn't get the link to work in the original post.