Thursday, September 20, 2007

Jon Stewart is a Genius

Jon Stewart asks Alan Greenspan an excellent question:

Why do we have a Fed? Why do we have someone adjusting the rates if we’re a free-market society?
Alan's answer is not satisfying, but I don't blame him: The economics profession does not have a good answer.

We economists have rigorous and fundamental theory to explain why we have environmental regulation (externalities) and to explain why we have antitrust laws (market power), but there is no consensus about what market failure calls for the existence of a central bank. The answer has something to do with the benefits of a system of fiat money. And it has something to do with the possibility of short-run monetary nonneutrality (due to sticky prices and/or imperfect information about prices). But the precise combination of elements that would yield a satisfying answer is still elusive.

Stewart stumbled upon a fundamental question of monetary economics. If anyone has a good answer, let me know, or publish it in the American Economic Review.