Advancing a Free Society

Putting New Fed Policy in the Economics Textbooks

Monday, December 20, 2010

Every Friday the economists at JP Morgan issue a useful compendium of facts and analysis called Global Data Watch. I've been reading GDW for many years, and I recall the days when it was only available in the paper edition.

Last Friday the economists moved a bit outside their data lane into undergraduate teaching with a major criticism that economics textbooks failed to teach students about the increase in excess reserves in the past two years. Their piece is called Blame the Textbook, Not the TA, for the Money Multiplier Confusion. Of course textbooks are not updated every week like GDW so it takes a while for them to reflect the latest developments. Nevertheless, the latest edition of my Principles of Economics text with Akila Weerapana, which has already been out for a year and a half now, does cover this increase in reserves and related developments. On page 635 of the 6th Edition, the Global Financial Crisis Edition, there is an explanation for the massive increase in excess reserves in a section called "The Explosion of Reserves and the Reserve Ratio in 2008." I agree that it is important to teach students these developments in monetary economics and policy, so I reprint that section below. By the way there is an explanation of quantitative easing on page 750 of the same text.

Continue reading John Taylor at Economics One