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This year, the  Nobel Prize in Economics  was awarded to American economist Edmund S. Phelps, whose book on labor was  favorably reviewed  by David Gordon and who has  engaged the Austrian theory  of the business cycle on the pages of the  Wall Street Journal . While rejecting the Austrian view, Phelps has nonetheless written that “we must honor

The recent flow of funds data released by the Fed shows that a level of private debt continues to soar. For instance, home mortgages as a percentage of disposable income rose to 97.9% in Q2 from 97% in the quarter before. The non-financial debt-to-nominal-GDP ratio stood at a record 2.1 in Q2 the same figure as in the previous quarter. Some

The economy has been in an expansionary phase for the past sixty months. According to the accepted rules of thumb, recessions are at least two quarters of negative growth in real gross domestic product (GDP). Recessions are also seen as something associated with the strength of the economy. The stronger an economy is, the less likely it is to fall

According to traditional economics textbooks, the current monetary system amplifies initial monetary injections of money. The popular story goes as follows: if the central bank injects $1 billion into the economy, and banks have to hold 10% in reserve against their deposits, this will cause the first bank to lend 90% of this $1 billion. The $900

The Bank of Japan’s zero interest rate policy since early 2001 has created an incentive to borrow in Japan at close to zero interest rates, and employ the borrowed money to buy high yielding assets such as US 10-year Treasury Notes. For instance, an individual borrows ¥106,200  from a Japanese bank at 0.5% interest rate, which he then exchanges

In a high-profile research paper titled “ Understanding the Evolving Inflation Process ,” published recently, a group of private-sector and academic economists have endorsed the Fed’s policy of price stability and transparency as an important tool in keeping inflation at bay. Economists have however, warned the Fed not to rely too much on

In their various speeches Fed policy makers have been emphasizing the importance of price stability for economic growth. For instance, in his speech on April 2 2007 to the National Association for Business Economics (NABE) the President of the Federal Reserve Bank of St. Louis William Poole said, Over time, the mainstream view in the economics

Recently some Federal Reserve officials such as Mishkin, Fisher, Lacker, Moskow, and Poole have voiced their support for setting inflationary targets. They believe that this will not only stabilize the rate of inflation but will also help to stabilize economic activity around sustainable levels. In short, setting targets could eliminate the menace

Why do individuals pay much higher prices for some goods versus other goods? The common reply to this is the law of supply and demand. But what is behind this law? To provide an answer to this question economists refer to the law of diminishing marginal utility. At that point, most people stop listening. Too technical for me! But in fact, it is

We have seen that the law of diminishing marginal utility is the key in the process of forming prices of present goods. This law is also the foundation for the establishment of the rate of exchange between present and future goods. This rate of exchange is also known as interest. The essence of the phenomenon of interest is what a lender or an